The price you "should" pay is based on the required rate of return , which is a technical term that discounts the semiannual and face-value payments to present-day values.
The required rate of return, financially speaking, is the rate you should "require" from your bond based on comparable investments that are available. The assumption is that it's pointless to invest in a bond if you can achieve an equivalent or better return with an alternative investment.
- Semiannual coupon payments.
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For example, if there are bonds available in the marketplace that pay 5 percent, and they carry they same safety and return characteristics that you require, a bond you invest in should have at least a 5 percent return to be attractive. Therefore, you would use 5 percent as your required rate of return.follow link
Pricing bonds with different cash flows and compounding frequencies
Because semiannual coupon payments are paid twice per year, your required rate of return, mathematically speaking, must be cut in half. Therefore, the example's required rate of return would be 2. To convert this to a coupon payment, or the amount of money you'd actually receive each period, multiply the face amount of the bond by the required rate of return. Future payments must be discounted to present values to determine how much you should pay for your bond, but you're best off using a bond calculator — or a financial adviser — to do the heavy lifting.
If you want to run through the equation on your own, you can calculate the discount factor by adding 1 to the semiannual required rate of return and raising the result to the nth value , where "n" is the period number expressed as a negative figure. In the example of a 5 percent bond — which has two 2.
Solved: 7. Valuing Semiannual Coupon Bonds Aa Aa Bonds Oft | igipijik.tk
Semiannual coupon and annual coupon. Thread starter nit Start date Jul 4, Thank in advance.
ShaktiRathore said:. Jul 4, I agree with Shakti.
Semiannual coupon and annual coupon
This can be confusing. However, at least in the FRM, questions tend to consistently employ the so-called "nominal" aka, stated interest rate , and this nominal rate is presumed to be per annum. So the reference to "stated" or "nominal" per annum is deliberately different than the effective annual.
David and Shakti have explained the issue in detail, so I'll just add a simple comment for you to easily memorize the answer.
In nearly almost every cases, interest rates as well as other percentage rates are quoted yearly, just like what David said it is per annum. This is the habit in the finance world. But how to compound the yearly interest rates is another issue.
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Just divide it! Unless the question explicitly mentions that the interest rate is quoted non-yearly, you have to use interest rate quoted in yearly term.
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