Situation 2) :- If the yield to maturity is 8% but the bond pays interest on a s
ID: 2745918 • Letter: S
Question
Situation 2) :- If the yield to maturity is 8% but the bond pays interest on a semi-annual basis instead of an annual basis, then the Current price of the bond:- (Please see note at the below) Current price of the bond = Interest amount * Cumulative P.V. factor @ 4 % for 40 Years + Principal amount * P.V. Factor @ 4 % of 40TH Year. = (1000 * 6.5 % * 6/12) * 19.7928 + 1000 * 0.2083 = 32.5 * 19.7928 + 1000 * 0.2083 = $ 852 (approx) How do you get the 19.7928 and the .208 what is the formula used ?
Explanation / Answer
Present value of annuity factor P×[1-(1÷(1+r)^n)]÷r Here, 1 Interest rate per annum 8.00% 2 Number of years 20 3 Number of compoundings per per annum 2 4 = 1÷3 Interest rate per period ( r) 4.00% 5 = 2×3 Number of periods (n) 40 Payment per period (P) 1 Present value of annuity factor 19.7928 1*[1-(1/(1+4%)^40)]/4% Present value factor FV×(1÷(1+r)^n) Here, 1 Interest rate per annum 8.00% 2 Number of years 20 3 Number of compoundings per per annum 2 4 = 1÷3 Interest rate per period ( r) 4.00% 5 = 2×3 Number of periods (n) 40 Future value (FV) 1 Present value factor 0.208 1*(1/(1+4%)^40)