# binomial interest rate tree

I hv a question…when we value a bond do we include the value of the coupon?

Say for example Exhibit 21 ( CFAI Reading 42) the top value at Time 2 is 102.0721…which includes the coupon of 5 at Time 2.

they r also included in Example 3 calculations.

but in Reading 43, these coupons r not included…

Yes, you include the value of the coupon.

Exhibit 12 n 13… for example in Exhibit 12 Year 2, the value at the bottom is 100.526, which does not include the coupon

What year curriculum do yo have? In my 2015, Exhibit 12 in reading 13 is about calculating forward rates; for time 2 at the bottom it has a question mark, not a value.

That’s better.

The value of the bond without coupon in the bottom box for year 2 is 100.526. The coupon is listed separately as 4.250. When you discount it back to year 1, you’ll be discounting 104.776 (= 100.526 + 4.250).

And so on.

Yes…I get th part…but shouldn’t the coupon increase the value of the bond at Time2 by 4.25? It makes a difference as to whether the option will be exercised or not, at Time2.

Yes. But in each box they accounting for it separately: here’s the value of the bond without the coupon, here’s the value of the coupon.

The value of the coupon doesn’t make a difference as to whether the option is exercised or not: you get the coupon either way. The option is on the bond without the coupon.

TQ!