# Bonds

A bond is issued at the end of the year 20X0 with an 8% semiannual coupon rate, 5 years to maturity, and a par value of \$1,000.
The bond’s yield at issuance is 10%. Using the effective interest method, if the yield has decreased to 9% at the end of the year
20X1, the balance sheet liability for the bond is closest to:
967.
935.
923.
Explanation
Using the effective interest method, the value of the liability is calculated using the bond’s yield at issuance. At the end of 20x1
the bond will have 8 semiannual periods remaining until maturity.
N = 8; I/Y = 10 / 2 = 5; PMT = 8 / 2 × 1,000 = 40; FV = 1,000; CPT PV = −935.37.
Can anyone explain why they used 8 instead of 10 for duration?

Thankas

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Valuation is 1 year after issue, so there are only 4x2 = 8 payments left.

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