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Suppose for $1,000 you could buy a 10%, 10-year, annual payment bond or a 10%,...

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Finance

Suppose for $1,000 you could buy a 10%, 10-year, annual payment bond or a 10%, 10-year, semi-annual payment bond. if $1,000 is the proper price for the semi-annual bond, what is the equilibrium price for the annual payment bond?

the equilibrium price=10%*1000/(1.05^2-1)*(1-1/(1.05^2)^10)+1000/(1.05^2)^10 =984.8021825, Explained why 1000 has to be divided by (1.05^2-1) (which is the EAR) ) and (1-1/(1.05^2)^10) doesn't divide by r.

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