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Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon Government of Canada bond with three years to maturity (YTM) has a coupon rate of 4%. The yield to maturity of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the bond: $990,187.73 $701,382.97 $825,156.44 $519,848.56 Based on your calculations and understanding of semiannual coupon bonds, complete the following statements: Increase/Decrease? Assuming that interest rates remain constant, the bond's price is expected to The bond described is selling at a Premium/Discount? When valuing a semiannual coupon bond, the time period N in the present value formula used to calculate the price of the bond is treated in terms of periods. 4-month annual 12-month 6-month Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the rate for a short-term riskless security in a scenario where inflation is expected to be zero. This is the premium added as a compensation for the risk that an investor will not get paid in full. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than Canada due to lower values of this premium. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. It is calculated by adding the inflation premium to r*. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. It is calculated by adding the inflation premium to r*. Inflation premium Inflation premium Real risk-free rate Default risk premium Liquidity risk premium Nominal risk-free rate Maturity risk premium sh Player MAC 32.0.0.453 As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. It is calculated by adding the inflation premium to r*. Inflation premium IP MRP DRP LP TRF ash Player MAC 32.0.0.453
