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Question 5. Bond pricing (1 points) A municipal bond with a par value of $1,000 and a maturity of 10 years has a coupon rate

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Answer #1

a)

Coupon = 0.05 * 1000 = 50

Bond value = Annuity * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Bond value = 50 * [1 - 1 / (1 + 0.04)10] / 0.04 + 1000 / (1 + 0.04)10

Bond value = 50 * [1 - 0.675564] / 0.04 + 675.564169

Bond value = 50 * 8.1109 + 675.564169

Bond value = $1,081.11

b)

Bond is selling at a premium

Bond is selling at a premium as the price is more than its face value of $1,000. this is because the company is offering a coupon rate more than what is offering in the form of interest. Here the coupon rate is 5% and interest rate is 4%

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