"A 5-year bond has semi-annual coupons, a duration of 8.2 semi-annual
periods, is priced to yield 8% convertible semiannually, and is purchased for
1080. The bonds redemption value is the same as the face value of 1000.
If the nominal coupon rate convertible semi-annually increases by 2%, what
would be the new purchase price?"
Now I would think you could use the Fr*annuity+nC^v=Bond Price formula in order to find the coupon rate here, but the solution says to use the Duration of Bond formula
(Fr*Increasing Annuity+nCv^n)/Bond Price and set that equal to 8.2.
My question is why do the two give difference answers for the coupon rate r? Can't you just do F=1000, r=?, annuity with n=10, i=4%, Price=1080, solve for r? Why do you have to use the duration at all?
-Richard
periods, is priced to yield 8% convertible semiannually, and is purchased for
1080. The bonds redemption value is the same as the face value of 1000.
If the nominal coupon rate convertible semi-annually increases by 2%, what
would be the new purchase price?"
Now I would think you could use the Fr*annuity+nC^v=Bond Price formula in order to find the coupon rate here, but the solution says to use the Duration of Bond formula
(Fr*Increasing Annuity+nCv^n)/Bond Price and set that equal to 8.2.
My question is why do the two give difference answers for the coupon rate r? Can't you just do F=1000, r=?, annuity with n=10, i=4%, Price=1080, solve for r? Why do you have to use the duration at all?
-Richard
Confused With How To Find Coupon Rate Here
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