The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.

Question

Quizplus · Accepted Answer

The value of a bond is determined by discounting its future cash flows using an appropriate discount rate. A bond that pays semiannual interest will provide more frequent payments and hence the investor will have the opportunity to reinvest the interest received at a higher rate. This reinvestment opportunity increases the value of the bond compared to an otherwise equivalent annual coupon interest paying bond.

The Value of a Bond That Pays Semiannual Interest Is