S2000 please help
I found out the following approach to value a bond using an interest tree from the Curriculum, however my question is when do you add the 5 at the end because other material do not add the 5 at the end and what is the correct approach
Find the correct price for a three-year, annual pay bond with a coupon rate of 5%.
Exhibit
T=0 T=1 T=2
2% 5% 8%
3% 6%
4%
Solution
Time 2 values will be:
0.5 × [(105/1.08 + 105/1.08)] + 5 = 102.2222
0.5 × [(105/1.06 + 105/1.06)] + 5 = 104.0566
0.5 × [(105/1.04 + 105/1.04)] + 5 = 105.9615
Time 1 values will be
0.5 × [(102.2222/1.05 + 104.0566/1.05)] + 5 = 103.2280
0.5 × [(104.0566/1.03 + 105.9615/1.03)] + 5 = 106.9506
There is no coupon payment at Time 0
0.5 × [(103.2280/1.02 + 106.9506/1.02)] = 103.0287