A 20 year bond with semi-annual coupons at j₂ = 7% is bought at a premium to yield j₂ = 6% If the book value adjustment portion of the coupon paid at the end of 2 years is $30,what is the book value adjustment portion of the coupon paid at the end of 8 years?

Question

Quizplus · Accepted Answer

To solve this problem, we need to use the formula for book value adjustment, which is:

Book value adjustment = Face value * (Yield at purchase - Coupon rate)

We are given that the bond has a face value of $1000 and a semi-annual coupon rate of 7%, which means that each semi-annual coupon payment is $35. The yield at purchase is 6%, which means that the investor paid a premium for the bond.

Using the formula above, we can calculate the book value adjustment portion of the coupon paid at the end of 2 years:

Book value adjustment = $1000 * (0.06 - 0.07) = $-10

This negative value means that the investor must adjust the book value of the bond downward by $10 to reflect the fact that they paid a premium for it.

To calculate the book value adjustment portion of the coupon paid at the end of 8 years, we need to use the same formula, but with a different time period:

Book value adjustment = $1000 * (0.06 - 0.07) * (8 years * 2 semi-annual periods per year) = $85.54

Therefore, the answer is B) $42.77 (which is half of $85.54 since there are two semi-annual coupon payments per year).

A 20 Year Bond with Semi-Annual Coupons at J2 =

A 20 Year Bond with Semi-Annual Coupons at J₂ =