In Arbitrgae Free Valuation Model Chapter: Example 3 , why we did not discount back cuopon (5) in Time 2 and Time 1?
That’s what the Curriculum taught:
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
Should not it would be like this: (As we do in the next chapter of Valuation of Callable Bond and Putable Bond)
0.5 × [(105+ 5 )/1.08 + (105+5)/1.08)] 0.5 × [(105+ 5 )/1.06 + (105+ 5 )/1.06)] 0.5 × [(105+ 5 )/1.04 + (105+5)/1.04)]
What makes it difference in calculation?
Which provider’s books are you using?
Example 3, Page 289, FIxed Income
Goodness gracious!
We’ve had this question 87 times over the last month.
I cannot stand that the prep providers don’t explain what they’re doing and how it’s ultimately the same as what the curriculum is doing.
Sheesh!
The best suggestion I can give to you is to look at the articles I wrote on binomial interest rate trees, starting here: http://www.financialexamhelp123.com/binomial-trees-for-fixed-income/
I know: it sounds self-serving to send you there where I’m going to charge you to look at the articles. Believe me, that’s not the motivation. (Well . . . not entirely.) In five minutes you’ll understand this stuff clearly and wonder why you ever bothered with the curriculum or another prep provider.
Take my word for it.