Query - Accrued Interest & Invoice Price

[Avishek]

Hi David

Back with another easy query. At 24.02 minutes of your Fixed Income - 1 Video, can you advise as to how you calculated the Full Price as $1020? Also not able to understand the calculation of Full Price at 26:36 minutes. What I mean is - let me know the calculation of either Full or Flat Price. Since I am able to calculate the Accrued Income only.

Thanks for yous help again!

Regards, Avi

 

[Avishek]

David,

Are we calculating the Present Value and then adjusting the AI?

Avi

 

[David Harper CFA FRM]

Hi Avi,

Not quite, the basic relationship holds: full (a.k.a., invoice) = flat + accrued interest.

I uploaded the EditGrid spreadsheet behind these examples (let me know if you think such links are useful, almost all examples have spreadsheets behind them to check for accuracy):

http://www.editgrid.com/bt/admin/LO_21.5_Accrued_Interest

The 'problem' with realistic, between-coupon pricing is that you can't use the straight calculator time value functions; i.e., you can't use N = 6.5 because it won't accrue the interest (similarly, btw, the =PV() function in excel doesn't work with non-integers)

So, in the case of the 1st example, the price of the bond at the most recent coupon date is $1,000

=PV(4%, 7, $40, $1,000) = $1,000 [as expected, if coupon = YTM, price = par!]

but that was, in this case, three months ago, so we just need to present value it (bring it forward) three months:

$1,020 = $1,000 x (1.04)^0.5

(that is the definitional nature of the YTM, it can be used as a discount rate all along the maturity curve)


Thanks,
David

 

[enjofaes]

weird got redirected here from 64.1 (i.e. page 49 of VaR (142 in vitalsource)also link on vitalsource for spreadsheet does not work

 

[Nicole Seaman]

weird got redirected here from 64.1 (i.e. page 49 of VaR (142 in vitalsource)View attachment 3906also link on vitalsource for spreadsheet does not work

@enjofaes This has been fixed in the PDF and in vital source, but unfortunately, there is an issue that is still causing this to happen. We are working with Vital Source to figure out the issue because it is not updating correctly when we upload the correct PDF. Here is the correct link for those PQs: https://forum.bionicturtle.com/threads/l2-t5-64-var-map-stress-test-jorion.3622/.