Question: A bond has a $2,000 face value. It pays an annual interest of 4% on its nominal value in two equal semi-annual installments. It is

A bond has a $2,000 face value. It pays an annual interest of 4% on its nominal value in two equal semi-annual installments. It is redeemable at its face value in 8 years.

a) If the prevailing interest rates are 6 % compounded annually, what is the effective semiannual interest rate, which would be applied to bond payments and compounded semiannually?

b) What is the bond worth now? (i.e., what is its Present Value). Draw the cash flow diagram.

c) If prevailing interest rates remain the same 6 % compounded annually, and I want to sell the bond in 5 years, how much should I sell it for?

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