Bonds with Semiannual Coupons
by MaestriAlthough some bonds pay interest annually, the vast majority actually pay interest semiannually. To evaluate semiannual payment bonds, we must modify the valuation model (Equation 4-1) as follows:
1. Divide the annual coupon interest payment by 2 to determine the dollars of interest paid each six months.
2. Multiply the years to maturity, N, by 2 to determine the number of semiannual periods.
3. Divide the nominal (quoted) interest rate, rd, by 2 to determine the periodic (semiannual) interest rate.
To illustrate, assume now that MicroDrive’s bonds pay $50 interest each six months rather than $100 at the end of each year. Thus, each interest payment is only half as large, but there are twice as many of them. The coupon rate is thus “10 percent, semiannual payments.” This is the nominal, or quoted, rateEnter N 30, r I 2.5, PMT 50, FV 1000, and then press the PV key to obtain the bond’s value, $1,523.26. The value with semiannual interest payments is slightly larger than $1,518.98, the value when interest is paid annually. This higher value occurs because interest payments are received somewhat faster under semiannual
compounding.
Taken From : Five-Minute MBA – Corporate Finance
Related posts:
- Credit Card Processing Companies PayPal’s Web site with a lot because the processor for...
Related posts brought to you by Yet Another Related Posts Plugin.
