Coupon payments

[Hend Abuenein]

Hi

If frequency of coupon payment is not specified in question, should we always assume that it's semiannual, the way the answer to Q Hull.06.02 did?
I solved it assuming annual payment, and got the same answer, but difference between two methodologies is the additional time required for the the step of counting exact number of days between payments.

Thanks
Hend

 

[David Harper CFA FRM]

Hi Hend,

You will not (and should not) have to assume: in fact, i have been corresponding with GARP this week on this very point (more broadly, it is also an issue for compound frequency: you must be told if the question is looking for discrete [e.g., annual, semi-annual] or continuous compounding. Usage in the assignments varies by author: Jorion tends to assume annual; Tuckman always uses semi-annual; Hull being academic employs continuous whenever possible).

GARP has indicated they appreciate the need to be specific in the question, so you won't need to assume. Getting the same answer (6.02) is atypical (I think that's a AI question..). In general, you will get a difference (in addition to what i called the "cognitive interrupt" wherein a more knowledgeable candidate, ironically, might pause knowing the problem can be done more than one way). So, GARP agrees that the question must be specific about the compound frequency (implied in coupon as well). Thanks, David