GARP Book 3 19.14

[ktrathen]

Hi Dave,

Do you get the same result as the book for question 19.14?

My initial bond price calculation (14 coupon periods, semiannual yield of 3%, coupon = 2) gives a price of 88.7039. Then discounted by three months to 87.4026.

The book has something different. Have I missed something here?

 

[Nicole Seaman]

Hi Dave,

Do you get the same result as the book for question 19.14?

My initial bond price calculation (14 coupon periods, semiannual yield of 3%, coupon = 2) gives a price of 88.7039. Then discounted by three months to 87.4026.

The book has something different. Have I missed something here?

Hello @ktrathen

Can you please copy/paste the entire question and answer so we (and other members) do not need to look for the question that you are referring to? This not only helps to save everyone time but when you copy/paste the actual question, it will show up in search when other members are looking for answers to the same question. Thank you.

 

[David Harper CFA FRM]

HI @ktrathen In regard to GARP's book 3 EOC 19.14 ...

... I agree with you about the $88.7039 (and it is a necessary step) but that is the price of a bond maturing in 7.0 years with its first (the next) coupon in six months (we typically do price a bond that pays the first/next coupon in six months) but per the CF rules we need the price of a bond maturing in 7.25 years (i.e., 7 + 4.5/12 rounded down to 7.25 years) so in order to price this bond three months forward in time (t0 + 0.25) we need to add the coupon. By adding the coupon we get $88.7039 + $2.00 = $90.7039 which is the price of the bond in three months where we are including the coupon paid in three months (unlike a typical situation which does not pay a coupon at time zero). Then discounting this to today (PV = t0) gets $89.3732. So I do agree with GARP's solution. I hope that's helpful,

 

[ktrathen]

Very helpful, thanks! I will make sure I post the question next time.