Question

A municipal bond has 6 years until maturity and sells for $5,420. If the coupon rate on the bond is 6.6 percent, what is the yield to maturity?

Please explain each step thoroughly

Answer 1

Manually solving for accurate YTM is very difficult and need advance maths techniques. So, accurate YTM calculation needs using excel or financial calculator.

Manual calculation for an approximate value of YTM can however be done. Mathematical representation for approx YTM calculation is as follows:

Now, like any other municipal bond, assuming this bond to be a semi-annual coupon paying bond.

So, in our question,

P = $5,420

F = $5,000

C = 6.6% * 5,000 = $330 (annually) => $165 semi-annually

n = 6 years => 12 semi-annual periods

Approx YTM = 2.4952% ---> Semi-annual

Hence, Annual YTM = 4.99%

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Calculating the same through Excel, exact annual YTM = 2.482% * 2 = 4.96%

Screenshots below show excel calculation