Error in CFAI Binomial Interest rate

Has anyone noticed that the CFAI method adds back the coupon twice at each node?

That’s there method = 0.5×(102.8/1.0456+102.8/1.0456)+2.8

Must be wrong surely?

This method is correct.

There have been a bazillion threads on this.

Well . . . now a bazillion and one.

The coupon isn’t being added twice. What makes you think that it is?

Correction…

Please note these points:

  1. The investor will receive (Principal + Coupon) at the maturity.

  2. Then you discount the (Principal + Coupon) from maturity to get PV at the previous period.

  3. Then you also need to add Coupon received at the end of previous period to get the Calculated Bond Price at the end of previous period…

Hope you understand it now.

All true, except DO NOT add the coupon back at t0. Bet the exam has one of the wrong answer choices waiting for someone who doesn’t remember this :slight_smile:

Oh Yeah. Obviously, never do that.