This is really bad, but i’m constantly unsure about this when answering questions When should you when doing a TVM calc for a bond for instance divide by the coupon schedule, (i.e. a semi annual bond with a 10% coupon) And when should you find the effective rate (1 + rate)^1/n If someone could clarify this it would be great. things are looking bleak. Thanks
If the question stem doesn’t state it, assume the bond is semiannual. Always double the the TTM, and divide the YTM and CPN by 1/2. Effective rate would be useful when you’re comparing bonds with different compounding periods (i.e. quarterly vs. semiannual vs. annual pay bonds)
Ok, so if you’re given an annual rate and interest is compounded quarterly you would simply divide by 4? I always screw this up on the first “savings for retirement” question on the quant section.
You would divide the annual rate by 4, multiply the time to maturity by 4, and divide the coupon by 4. Example: Find the PV of a 1000 par bond that pays 5% coupon quarterly, 7% YTM, and matures in 3 years. N would be 12 i would be 7/4 = 1.75 CPN would be 1000*.05 = 50/4 = 12.5 PV would be 940.9325
Thanks a lot!