ANT371H1 Study Guide - Show Tv, Purch Group, Accrued Interest
Document Summary
A bond is a security which o ers semi-annual* interest payments, at a rate r , for a xed period of time, followed by a return of capital. Suppose you purchase a ,000 utility bond, freshly issued, which o ers 16% interest per annum, payable semi-annually, and matures in 15 years. What you have in e ect purchased is an annuity of 15 2 = 30 semi-annual interest payments of each ( 8% of ,000), plus a return of your ,000 15 years later. On the face of it, you are receiving ,400 in return for your original ,000. But the interest payments span a period of 15 years, so let us calculate the present value of all interest payments, and the present value of the ,000 returned in 15 years" time. The present value will depend on the current interest rate; suppose it is i per semi-annual period.
