Hello! I have a quick question on Reading 55, term structure. I am puzzled on the Exhibit 6 (page 242), 1 year issue price at horizon 99.85265, plus coupon 1.65, give total poceeds 101.5027. My questions are 1), price at horizon is PV, coupon paid at the end of period, why add two together to derive the total proceeds. 2), total return is 3%, how does it come from? I might have missed something from Level 1! Thank you!
- Price at horizon is the present value of the future cash flows. The initial yield on the 1-year treasury security is 3.3% (BEY). However, if the 6 month forward rate is realized, the yield would increase to 3.6% (also BEY). So after six months, the security will have 6 months left with one coupon payment of $1.65. The price after 6-months (considering the forward rates are realized) will be calculated as: ($100 + $1.65) / (1+(0.036/2)) = $99.85265 Note that the $1.65 used in this formula refers to the coupon that would be received at the end of year 1. Now, at time 0.5 (6 months), the investor would still receive the semi-annual coupon of $1.65. So total proceeds would equal $99.85265 + $1.65 = $101.5027 2) Initial investment was $100. At the end of 6 months, the investor’s investment is worth $101.5027. So, the return for these six months would then be calculated as = ($101.5027/$100) - 1 = 0.015 or 3% as BEY. Hope this helps. I would recommend you attempt practice questions at finquiz.com to enhance your grasp of the concepts.
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Thankyou :d
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Thanks! That’s very helpful.
starbuk Wrote: ------------------------------------------------------- > is that website any good? no
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