What is the face value of a municipal bond that has a bond (or coupon) interest rate of 6% per year and makes interest payments of 578 dollars every 1 months?
To calculate the face value of a municipal bond, we need two pieces of information: the bond interest rate and the interest payment amount.
In this case, the bond interest rate is 6% per year, and the interest payment is $578 every 1 month.
Step 1: Convert the annual interest rate to a monthly interest rate.
To convert the annual interest rate to a monthly rate, divide it by 12 (the number of months in a year).
In this case, the monthly interest rate would be 6% / 12 = 0.5% per month.
Step 2: Calculate the face value.
The face value (also known as par value or principal value) is the amount that will be repaid at the maturity date of the bond. It is the total amount of money you will receive when the bond reaches its maturity.
To calculate the face value, divide the interest payment by the monthly interest rate:
Face Value = Interest Payment / Monthly Interest Rate
In this case, the face value is $578 / 0.5% = $115,600.
Therefore, the face value of the municipal bond is $115,600.