Question

What are the three adjustments that have to be made in going from annual to semi-annual bond analysis?

Short answer

Three adjustments relating to the semi annual bond analysis are the adjustments in annual interest rate, maturity period, and annual yield to maturity.

Step-by-step solution

Semi annual returns

Semi annual returns are the returns provided twice a year. These returns are calculated on annual basis but required adjustments are done in the factors of return.

Adjustments for semi annual return

Return on the bond is calculated based on three factors –

i) Interest rate

ii) Maturity period

iii) Yield to maturity

So for making an analysis for semiannual bonds following adjustments must be done–

1. Divide the annual interest rate by 2 because interest received twice a year.

2. Multiply the number of years by 2 as interest received by twice a year number of period also become twice.

3. Divide the annual yield to maturity by 2 because every other factors are semi-annual therefore annual yield for semi-annual period are used.