A municipal bond with a coupon rate of 4.2 percent is currently selling at a yield-to-maturity of 4.96 percent. What is the price of the bond if it has 14 years to maturity? Assume that the bond has a face value of $5,000.

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to use the present value formula:

PV = (C / r) x (1 - 1 / (1 + r) ^ n) + FV / (1 + r) ^ n

Where:
C = Annual coupon payment = Face value x Coupon rate = $5,000 x 4.2% = $210
r = Yield-to-maturity = 4.96% or 0.0496
n = Number of years to maturity = 14
FV = Face value of the bond = $5,000

Substituting the values into the formula, we get:

PV = ($210 / 0.0496) x (1 - 1 / (1 + 0.0496) ^ 14) + $5,000 / (1 + 0.0496) ^ 14
PV = $4,619.71

Therefore, the price of the bond is $4,619.71, or choice C.

A Municipal Bond with a Coupon Rate of 4