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I have a bond that pays out semi-annually. The coupon is 0.14, which means it pays 0.7 after 6 months, and then 100.7 after another 6 months. I need to find the discount factors by bootstrapping. Is the following approach corect: ZC1= 0.07 And, $100= \frac{0.07}{1} + \frac{100.07}{(1+z)^2}$, where z is the zero coupon rate for 1 year. Now my question is: should the discount factor for a year be $\frac{1}{(1+z)^2}$ or $\frac{1}{(1+z/2)^2}$

I'm new to finance, apologise if the doubt is too easy

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first of all, I guess you mean coupon rate is 14%? which means it pays 7 after 6 months and then 107 after another 6 months? then your formula should be 100 = 7/(1+z/2)+ 107/(1+z/2)^2 this gives you the Yield to Maturity, assuming the current bond price is at par(i.e. 100)

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  • $\begingroup$ for calculating discount factor would i use z or z/2? $\endgroup$
    – user57200
    Jul 7 at 7:42
  • $\begingroup$ also for say 1.5 years, will i use z or z/2? $\endgroup$
    – user57200
    Jul 7 at 7:42

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