why doesn’t the answer start calculations with the rates in Y3 but instead jumps directly into using rates from Y2? please help as i’m sure OAS is on the exam and i don’t want to screw up the calc. thx
That’s how it works. You should hit the books for callable bonds valuation…
b/c yr 3 is the yr the bond matures, so the price will be par (100) at maturity regardless of what prevailing rates are. b/c of that you need to begin CALCULATING values for year 2. to do that you take the price in year 3 (100), plus the coupon (6% of 100 = 6), and discount to each node based on its interest rate. all of those values for yr 2 are just 106 discounted @ the appropriate rate, but w/ a max value of 101 (b/c that’s the strike of the call option). i don’t understand why you add the coupon at every node for the calculation b/c i’d think it would already be reflected in the price. but at this point i don’t care, i just know i need to do it.
You need to add the coupon payments to each node because you receive an annual coupon…It’s reflected in the price that you will receive the coupon…so you do need to get it and take it into account
i just went back and re-read the question…3 year callable bond is what i missed the first time…thanks all
the coupon was biannual, do we still add 6 on each year and are the calcs the same? I think a schweser mock did if differently.
I’m looking at CFAI mock, I don’t know