A $5,000 face value municipal bond matures in 8 years and has a market value of $5,120. The coupon rate is 3.5 percent with interest paid semiannually. What is the yield to maturity?

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the yield to maturity of a bond:

P = C * (1 - (1 + r)^-n) / r + FV / (1 + r)^n

Where:
P = Market value of the bond
C = Periodic coupon payment
r = Yield to maturity
n = Number of periods
FV = Face value of the bond

Substituting the given values, we get:

5,120 = 87.5 * (1 - (1 + r)^-16) / r + 5,000 / (1 + r)^8

Solving for r using trial and error or using a financial calculator or Excel, we get:

r = 3.16%

Therefore, the answer is B, 3.16 percent.

A $5,000 Face Value Municipal Bond Matures in 8 Years