CFAI problem 10 on page 311 says C is incorrect because it assumes that a coupon is paid in Year 1 (time zero) when no coupon payment is paid in time zero; therefore, you don’t add the $6 coupon payment to the Year 1 calculation. My understanding of this is that coupon payments are as of the end of the year, so that’s why you don’t include the coupon payment.
HOWEVER, the Schweser example on page 175 adds the coupon payment to calculate Vo at Node 0!
This is really busting my brain as I just can’t figure out which method is correct.
The Schweser example on page 175 adds the coupon payment to calculate Vo at Node 0 ==> The final answer is 102.999. We stop there. We don’t have to add a coupon payment at time zero to come up with the final answer.
When they say “adding the coupon payments to calculate”, it means we add them to the Vs of previous nodes. For V0, since there’s no coupon payment at time zero, we don’t have to add any coupon payment.
I think you misundestand the explanation in the CFAI book
Thanks for you help, but I still see a conflict. In the Schweser example, coupon payments are added to the bond prices and divided by the Vo interest rate. However, in the CFAI example, coupon payments are not added to the bond prices when divided by the Year 1 interest rate. I guess I’m just not seeing the distinction…
Are you sure ? I just took the calculation again and got B ($109.0085). At Node 0 we don’t have to add a coupon of $6 cuz at time zero there is no coupon payment. If we add $6, we will get $109.0085+$6 = $115.0085 (answer C ) which is incorrect.
Here are my calculation for the problem in EOCs. Coupon payments are added to the bond price when divided by the year 1 interest rate.
I understand that you don’t add the coupon payment to the final result (109.008). The coupon was added to the bond prices prior to Vo Node and discounted using the Node 0 rate. I totally get this and thank your for your help.
You need to look at CFAI question 10 on page 311. The coupon is not added to the second to last node to calculate the Time 1/Vo Node. I think you’ll understand me if you look at the CFAI question.