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How to Calculate the Price of a Bond With Semiannual Coupon Interest Payments - Budgeting Money
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How to Calculate the Price of a Bond With Semiannual Coupon Interest Payments
Let's conquer your financial goals together See you at the top! Search Search:. The simple but imprecise way to calculate semi-annual bond yields To get an initial approximation of a semi-annual bond yield, one simple method is simply to take the coupon rate on the bond to calculate the semi-annual bond payment and then divide it by the current price of the bond to get a yield. In other words, they are non-linear functions with different level of non-linearity, thus they will never match. An economic interpretation of the result would be that having more coupons payable, the investor encounters higher reinvestment risk, therefore the price should be lower to compensate that risk.
Las almas de todos los hombres son inmortales, pero las almas de los justos son inmortales y divinas. Is the discount rate an effective annual rate? Then discount the periods using this? The semi annual bond is worth more when trading at a premium and the difference lies in the reinvestment risk as noted by Harrogath.
When the market rate exceeds the bond rate there is reinvestment risk. When the bond rate exceeds the market rate there is no reinvestment risk.
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Both bonds sell at a discount however with the semi-annual coupons, I can reinvest for an extra 6-months at a higher market rate hence it has a higher present value than the annual bond. The premium is smaller as the coupon rate is closer to the market rate.
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The difference between the annual and semi-annual is larger as you are compounding for an additional 6 months at a higher rate. I understand why the bonds trade at a discount or premium based but I do not understand the reinvestment risk aspect. If I received a discount halfway through the year, could I not invest that coupon at the market rate guaranteed and hence earn more through additional compounding?
What you mean is that you should have converted the annual, nominal rate to a semiannual nominal rate, and you should just say so. This really surprises me, because I know you to be much better than to make this sort of silly mistake. This is all silliness.
Pricing bonds with different cash flows and compounding frequencies
When there are interim cash flows there is always reinvestment risk, regardless of the market rate. When there are no interim cash flows, there is never reinvestment risk, regardless of the market rate. That explained it perfectly. I want to apologize for such a foolish post I made. Indeed I was wrong on my response fueled by a big confusion of mine.
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