# Reading 44 ■ Introduction to Fixed- Income Valuation

My concern is why for 7 years, the answer is not considering N=12 instead of 6 because it’s a semi-annual bond? Could anyone please help with the explanation?

Q: Assume a city issues a \$5 million bond to build a new arena. The bond pays 8% semiannual interest and will mature in 10 years. Current interest rates are 9%. What is the present value of this bond and what will the bond’s value be in seven years from today?

Explanation

Present Value:

Since the current interest rate is above the coupon rate the bond will be issued at a discount. FV = \$5,000,000; N = 20; PMT = (0.04)(5 million) = \$200,000; I/Y = 4.5; CPT → PV = -\$4,674,802

Value in 7 Years:

Since the current interest rate is above the coupon rate the bond will be issued at a discount. FV = \$5,000,000; N = 6; PMT = (0.04)(5 million) = \$200,000; I/Y = 4.5; CPT → PV = -\$4,871,053

Begin your Level II studies with a FREE Schweser JumpStart Package. Available to December 2019 Level I CFA candidates only. Offer expires 1/29.

20 - 7*2 = 20 - 14 = 6

Bond will pay 20 coupons; after 7 years, 14 coupons paid, so 6 remain.

“Mmmmmm, something…” - H. Simpson

I see…sounds great! thanks million:)