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Dear John. If the company has 3 years 5 % coupon bond redeemable at par, it needs to pay interests of 5 in years 1,2 and in year 3 principal together with interest of 105. Then if we want to calculated a MV , the abve CFs would need to be discounted at yield. What would be the the cashflows , if the question said , that interests are paid each 6 month. How in such a case arive to the MV of the bond.Thank You in advance. Joanna
If you want me to answer, then you must in future ask in the Ask the Tutor Forum and not in the general P4 forum.
It is unlikely that you would be asked to deal with 6-monthly interest.
However, if you were, then you would need to discount 6 six-monthly payments of interest of 2.50 each time. To do this you would need to calculate the annuity factor for 6 periods at the 6 monthly yield interest.
To get the 6 monthly yield interest you would use the fact that
(1 + r) ^ 2 = 1 + R (
where r is the 6 monthly yield and where R is the yearly yield.
(Again, it is very unlikely that you would be required to do this in the exam)
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