bond pricing discount

This topic has 5 replies, 2 voices, and was last updated 4 years ago by John Moffat.

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July 25, 2020 at 3:38 pm #577980
qawsedrf
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sir, for example,
3yr semi-annual Bond Face value = 5m
nominal rate = 10%
market rate = 12%
It appears I cant use discount method like this
250000/1.12^0.5 + 250000/1.12^1 + 250000/1.12^1.5 …
But i have to do like this
250000/1.06^1 + 250000/1.06^2 + 250000/1.06^3 …
why cant i use the above method? i see it is not wrong.
July 25, 2020 at 4:04 pm #577982
qawsedrf
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https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/international-project-appraisal.html
I saw this TA and learned that 6 months can be discounted using ^0.5
July 25, 2020 at 5:57 pm #577995
John Moffat
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Yes – using ^0.5 etc is the correct method 🙂
July 26, 2020 at 2:42 am #578069
qawsedrf
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But sir, n=number of periods and if i use 0.5 method for bond calculation, it is wrong. I would like to know why we cant use 0.5 method to find issue price of bond, when it seems very acceptable for me.
July 26, 2020 at 2:51 am #578070
qawsedrf
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Does this mean that, since n = number of periods, the discount rate for 6months in Technical article above should be as (1/1.06^1)?
July 26, 2020 at 9:32 am #578087
John Moffat
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But the answer in the article does use ^0.5 to do the discounting for 6 months, as I wrote in my previous reply.
The discount factor for 6 months (half a year) is 1/1.12 ^0.5
The discount factor for 18 months (1.5 years) is 1/1.12 ^1.5
and so on.
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