the following problem is what I am working on.
Suzan can buy a zero coupon bond that will pay $1000$ at the end of $12$ years and is currently selling for $624.60$. Instead she purchases a $6\%$ bond with coupons payable semi-annually that will pay $1000$ at the end of $10$ years. If she pays $X$ she will earn the same annual effective interest rate as the zero coupon bond. Calculate X.
I understand that the effective interest rate per 1/2 a year is $1.98\%$ from the zero coupon bond, but I am not understanding what the other coupon does.
Is the redemption fee $1000$? Is the Future value of the bond $1000$? Either way I did not get the correct answer which is $1167$.
I appreciate any help.
With zero coupon bond, using your calculator, when $n = 24$ (bi-annual payments), $i = {}?$, $PV = 624.6$ and $FV = -1000$, we have that $i = 3.96$ which is the bi-annual interest so the interest would be $I = 3.96(2) = 7.92$.
With the 10 year bound, we have that we receive two coupon payments a year totalling $\$60$ so that is two payments of $\$30$. In your calculator, you would enter: \begin{align} n &= 20\\ i &= 3.96\\ PV &= \\ PMT &= -30\\ FV &= -1000 \end{align} Yields the answer you don't agree with. Note that both PMT and FV must carry the same sign since you receive the FV and the PMTs.