selling price of bonds

missl

New member
Joined
Nov 12, 2007
Messages
33
Hey does anyone know if the n: is 2*2 =4 because of the selling price of bond is april 18, 2007 and mature on aug 1, 2009 or do we count as apri 18 to aug 1?

A bond with a face value of $1,000 bears interest at 10% payable semi-annually. The bond matures on August 1, 2009. What is the selling price of the bond on April 18, 2007, to yield 9% compounded semi-annually?
 

stapel

Super Moderator
Staff member
Joined
Feb 4, 2004
Messages
15,948
As has been mentioned in various of your other threads, the "n" refers to the number of compoundings per interest-rate period.

For instance, if the interest rate is quoted as being "annual", then the interest-rate period is one year. Then if the interest were compounded monthly, n would be 12, because there are twelve months in one year. If the interest were compounded quarterly, then n would be 4, because "quarter" means "one-fourth", and there are four fourths (four quarters) in one year. If the interest were compounded daily, then n would be 360, 365, 366, or 365.25, depending on how a "year" is defined (by the bank and/or contract) in terms of the number of days.

I hope this clarifies this issue for you.

Eliz.
 

Denis

Senior Member
Joined
Feb 17, 2004
Messages
1,723
missl said:
A bond with a face value of $1,000 bears interest at 10% payable semi-annually. The bond matures on August 1, 2009. What is the selling price of the bond on April 18, 2007, to yield 9% compounded semi-annually?
This is what the cash flows look like:
Code:
Apr18/07       Aug1/07       Feb1/08       Aug1/08         Feb1/09           Aug1/09
PV = ?            50            50            50             50             50 + 1000
So you need the PV of 5 semiannual payments of 50, plus the PV of 1000 for 5 semiannual periods; so N = 5.
This will give the PV (or selling price) AS AT Feb1/07.
To calculate as at Apr 18th depends on the method agreed upon:
in my days, we'd take days from Feb 1st to Apr 18th: 27 + 31 + 18 = 76;
then the days from Feb1/07 to Aug1/07: make it 182 (I ain't counting 'em!)

We would then add 76/182 * 50 = ~20.87 to the purchase price (since we had earned that portion).

What can I say :shock:
 

missl

New member
Joined
Nov 12, 2007
Messages
33
Okay I kind of get it. But where does the Feb comes in? :?
 

Denis

Senior Member
Joined
Feb 17, 2004
Messages
1,723
missl said:
Okay I kind of get it. But where does the Feb comes in? :?
You seem to be complicating things that are simple!
If it's semi-annual, then it's TWICE per year, or every 6 months, right?
If Aug 1st is the date of 1 of those 2 periods, then what is the other?
 
Top