Move the market rate above and below the 8% contract rate and watch the issue price cross par.
$4,000
par × 4% — fixed by contract
$100,000
$0
| Period | Straight-line | Effective interest |
|---|---|---|
| Issue | $100,000 | $100,000 |
| 1 | $100,000 | $100,000 |
| 2 | $100,000 | $100,000 |
| 3 | $100,000 | $100,000 |
| 4 | $100,000 | $100,000 |
| 5 | $100,000 | $100,000 |
| 6 | $100,000 | $100,000 |
| 7 | $100,000 | $100,000 |
| 8 | $100,000 | $100,000 |
A bond promises two things: the at maturity, and a series of equal interest payments — an . discounts both back to today at the market rate, and their sum is the price.
Semiannual bonds halve the annual rate and double the number of periods before pricing — the 8% contract rate becomes 4% every six months, and 4 years becomes 8 periods.