Fixed Income - binomial - coupon issue

CFA Level II
#1

Hi all,

Does anyone notice that sometimes the coupon values are discounted and other times, it is only added after the discount?

This is quite troubling due to the inconsistencies.

#2

please give specific questions so we can take a look at comment

#3

There are a dozen threads on this topic.

Hunt round and you’ll find at least one.

#4

And of all of those threads, there is still not a simple explanation. I find that when we use putable and callable bonds,

  • we don’t add coupons to the 3rd node (starting with backward induction) it’s just face value

  • at the beginning (node 0) we add coupons and discount them

  • we discount with coupons throughout the whole process

when we do this for regular bonds

  • we use the face value + coupon discounted and THEN add the coupon

  • at node 1 and 2 we just use the calculated value and add the coupon AFTER discounting

  • we never discount the coupon at the beginning (node 0)

#5

I know for interest rates caps and floors, it’s a different technique and I know that we can’t let the bond go above for a call or below for a put… the question relates to the v=0 and where we start v=3

the rule for option bonds v non option bonds. I know you all know exactly what I am referring to, as you have put it s2000, there’s so many threads on this…

#6

Well, in that case, best of luck to all of you sitting for the exam tomorrow. Cheers

#7

At each node you have the discounted value from the subsequent nodes, and you have the coupon payment. The value of the bond at that node is the discounted value from the subsequent nodes. The value that you will discount to the prior node is the value of the bond plus the coupon.