Question

Union Local School District has bonds outstanding with a coupon rate of 4.3 percent paid semiannually and 18 years to maturity. The yield to maturity on these bonds is 3.4 percent and the bonds have a par value of $10,000. What is the dollar price of each bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What is the bond price?

Answer 1

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Prima facie, the bond will trade at Premium as YTM<coupon rate

Year	Cash flow	PVAF/[email protected]%	Present Value (Cashflow*PVAF/PVF)
1-36	215	26.7611*	5753.63
36	10000	0.5451**	5450.62

Current Market Price of Bonds = Cashflow*PVAF/PVF

= 5753.63+5450.62

= $11204.25

Note : Since the bond makes semiannual interest payments, total no. of period is 36 (18*2), cashflow per period is 215(1000*4.3%/2) and cashflows are discounted at 1.7% (3.4/2).

*PVAF = (1-(1+r)^-n)/r

**PVF = 1 / (1+r)^n