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. 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. The difference between the annual and semi-annual is larger as you are compounding for an additional 6 months at a higher rate.
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- Suppose a ten-year, $1,000 bond with an 8% coupon rate and semi-annual coupons is trading for....
- Origin of the term;
- How to Calculate Semi-Annual Bond Yield -- The Motley Fool.
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- Semi-annual rate?
- The yield to maturity of a 1000 bond with a 7 coupon?
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. 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. Skip to main content. 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. 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. You must log in or register to reply here. Why Take the Exam? Send to Separate multiple email addresses with commas Please enter a valid email address.
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How to Calculate the Price of a Bond With Semiannual Coupon Interest Payments - Budgeting Money
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