A $5,000 face value municipal bond matures in 10 years and is priced at $4,850

Accounting Oct 19, 2020

A $5,000 face value municipal bond matures in 10 years and is priced at $4,850. The coupon rate is 4.75% with interest paid semiannually. What is the yield to maturity on the bond?

Multiple Choice

5.61%
5.85%
5.40%
5.14%
4.77%

Expert Solution

Computation of Yield to Maturity using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)

Here,

Rate = Yield to Maturity = ?

Nper = 10 years * 2 = 20 Periods

PMT = $5,000*4.75%/2 = $118.75

PV = $4,850

FV = $5,000

Substituting the values in formula:

=rate(20,118.75,-4850,5000)*2

Rate or Yield to Maturity = 5.14%

So, the correct option is 4th "5.14%".

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