Union Local School District has a bond outstanding with a coupon rate of 3.7% paid semiannually...

Union Local School District has a bond outstanding with a coupon rate of 3.7% paid semiannually and 16 years to maturity. The yield to maturity is 3.9% and the bond has a par value of $5,000. What is the price of the bond?

Expert Solution

Price of Bond = $4,882 or $4,881.80

The final answer may vary due to rounding off in PV factor

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate	Face Value	$ 5,000
Market Rate	3.90%	1.95%	Term (in years)	16
Coupon Rate	3.70%	1.85%	Total no. of interest payments	32

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 5,000	at	1.95%	Interest rate for	32	term payments
PV of $1	0.53902
PV of	$ 5,000	=	$ 5,000	x	0.53902	=	$ 2,695	A

Interest payable per term	at	1.85%	on	$ 5,000
Interest payable per term	$ 93

PVAF of 1$	for	1.95%	Interest rate for	32	term payments
PVAF of 1$	23.63976
PV of Interest payments	=	$ 93	x	23.63976	=		$ 2,187	B

				Bond Value (A+B)			$ 4,881.80

ekkarill92 answered 5 months ago

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