Union Local School District has a bond outstanding with a coupon rate of 3.2 percent paid semiannually and 21 years to maturity. The yield to maturity on this bond is 3.5 percent, and the bond has a par value of $5,000. What is the price of the bond?

The price of the bond is $4,778.24

Explanation:

The price of the bond to any rational investor is the present value of all the future cash flows receivable from the bond. The future cash flows in this sense comprises of periodic coupon interests as well as the repayment of face value upon redemption.

The present value can be computed using the present value formula in excel which is given as:

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

pv is the current price of the bond which is unknown

rate is the rate of return that is the yield to maturity. The yield to maturity should semi-annual yield to maturity, 3.5%/2=1.75%

nper is the number of years to maturity 21, multiplied by 2 since coupon is semi-annual

pmt is periodic interest = 3.2%/2*$5000=$80

fv is the par value of the bond receivable at redemption

=pv (1.75%,42,80,5000)

=$4778.24