Question

In calculating the current price of a bond paying semiannual coupons, one needs to

A) use double the number of years for the number of payments made.
B) use the semiannual coupon.
C) use the semiannual rate as the discount rate.
D) All of the above need to be done.

Answer 1

In calculating the current price of a bond paying semiannual coupons, one needs to use double the number of years for the number of payments made, use the semiannual coupon, and use the semiannual rate as the discount rate.

Step-by-step explanation:

In calculating the current price of a bond paying semiannual coupons, one needs to do all of the following:

1. Use double the number of years for the number of payments made.
2. Use the semiannual coupon.
3. Use the semiannual rate as the discount rate.

For example, let's consider a two-year bond that pays semiannual coupons. If the bond has a par value of $1,000 and a coupon rate of 8% per year, it would make four coupon payments over the two-year period. To calculate its current price, you would use four periods (double the number of years) and discount each semiannual coupon payment at the semiannual discount rate.