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Semi-annual Coupons

Semi-annual Coupons. Semi-annual coupon payment = [coupon rate / 2] x par value e.g. 9% coupon rate, 12 year bond paying semiannually: Coupon payment= [0.09 / 2] x $1,000 = $45 Number of payments = 12 x 2 = 24 Semiannual required rate of return = 3%.

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Semi-annual Coupons

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  1. Semi-annual Coupons • Semi-annual coupon payment = [coupon rate / 2] x par value e.g. 9% coupon rate, 12 year bond paying semiannually: Coupon payment= [0.09 / 2] x $1,000 = $45 • Number of payments = 12 x 2 = 24 • Semiannual required rate of return = 3%

  2. Example: Semi-annual Coupon • 10 year bond, 10% semi-annual coupon rate, find the price under different YTMs? • At 10% One year later • At 11% • At 9%

  3. Example 2: Semi-annual Coupon • What is the price of a $1000 par, 30 year bond with a 12% semi-annual coupon when the interest rate on similar securities is 9%?

  4. Example: Solving for YTM • Consider a $1000 5 year bond with a 8% coupon • What is the YTM if it is selling for $1000? YTM = 8% • If it is selling for $900? YTM = 10.68% • If it is priced at $1100? YTM = 5.65%

  5. Example 2: Solving for YTM • What is the YTM for a $1000 bond with a current price of $900, 10 year maturity, and a coupon rate of 7%, paid semiannually? • Problem 7.7 from the book (6th edition)

  6. Example: Zero Coupon Bond • If market rates are 6%, what is the price of a 10 year, zero-coupon bond that has a $1000 face value? • What if exactly one year passes and rates decline to 5%?

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