I just didn’t understand how discounting a cash flow with the fraction of ( days between settlement date and next coupn payment date / days in coupon period) will give a FULL price that will include the accrued interest. I thought it would give a clean price.
For example, (referece : pg 500, CFAI Book intro to valuation of debt securities)
5 semiannual coupon remaining
8% annual discount rate
78 days between settlement date and the next coupon date
182 days in coupon period
we will have a price of $106.8192.
when if we calculate the bond price at the begining (without any thing mentioned above, this is regular valuation using n=1,2,3 and so on) then the price is $104.45
so now what i don’t understand here is how that $106.8192 included the Accured interest rate WITHOUT computing Days in Accrued interest period ( 110 days).
Any explanation would be great.