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

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

It’s almost NYE. Go party or something.

thanks breadmaker