Semiannual Interest and Bond Values

The procedure to value bonds paying interest semiannually (half-yearly) is similar to that illustrated for compounding interest more frequently than annually. However, here we have to find out the present value. 'The following steps are involved in computing the value of a bond when interest is paid semiannually:

•  Convert annual interest, I, to semiannual interest by dividing it by 2.
• Convert the number of years to maturity, n, to the number of 6-month periods to maturity by multiplying n by 2.
• Convert the required stated return for similar-risk bonds that also pay half-yearly interest from an annual rate, K, to a semiannual rate by dividing it by 2.

Symbolically

1

Share This