Bond interest question

[michaelrack]

My finance class recently started talking about bonds and I am having a little difficulty with understanding why bond interest is considered compound rather than simple.
My textbook states that a $1000 bond with a 6% coupon would pay semiannual $30 payments and that the coupon payments would be considered compound interest, compounded semiannually. However, to me it seems that these payments would be simple interest, since interest is not being paid on the previous period's interest.
If anyone could clarify this, I would appreciate it.
thanks

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[Stroganoff]

The math looks like simple interest to me as well, but I'm new to bonds... Just looks like a simple interest (APY) payment with 50% of it coming to you in a 6-month advance but the second semiannual payment is calculated on the initial value.

Maybe it's all semantics. Simple interest = one payment/year and compound interest = multiple payments per year. So maybe when they say "compound interest," they don't mean that it's calculated as compound interest (math definition) but maybe that it is compounded more than once annually.

I'm just as in the dark on this too...

 

[michaelrack]

Thanks. I think I'll post the question on the on-line discussion board for my finance class and see what the prof says; I'll let you know if he provides any further clarification.

 

[michaelrack]

I asked my finance prof my original question, and he said it was because we make the assumption that we are reinvesting the coupon payment at the same rate.

 

[etf]

I asked my finance prof my original question, and he said it was because we make the assumption that we are reinvesting the coupon payment at the same rate.

that's a pretty terrible assumption, especially considering the rate environment we're in. i got a 7.8% coupon payment for some Ford bonds in december...where am i supposed to reinvest that in anything above 3% now?

 

[deleted126335]

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