Present Value vs Flat Price

CFA Level 1 2017 Official Curriculum, book Equity and Fixed Income, page 411, example 5:

[question removed by moderator]

My question is, why doesn’t Flat Price equal the present value price? Why is 101.625437 ≠ 101.661589

Thanks

Accrued interest.

accrued interest what? Were you trying to imply that the difference between Flat Price and the present value is the accrueed interest?

Flat Price of 101.625437 - present value of 101.661589 = -0.036152

Accrued interest is 1.4833333 (≠ -0.036152)

So, could you elaborate, please?

Thank you

The convention for computing accrued interest is to treat it as simple interest.

The proper way to compute accrued interest is to treat it as compound interest.

The 3.6¢ difference is the difference between computing accrued interest improperly and computing it properly.

Be more specific

Ask nicely.

Could you be more specific, please? I would like to understand that concept and the logic and mathemathics behind it but unfortunately the meaning thereof evades me.

Thank you in advance, good sir.

please, I beg

You needn’t beg.

I’m working on linear algebra and differential equation midterm exams, but I’ll get back to this later today or tomorrow.

Have patience.

so?

How long do I have to wait for the answer?

What is it that you’re asking? The flat price is the price without including AI, this is what bonds are usually quoted at. The full price is the price when accounting for the interest that has accrued since the start of the accrual period. I feel like you could have figured this out by now rather than waiting for someone to answer for you. Check out Mark Meldrums videos on youtube.

Accrued Interest uses a simple fraction…

While actual TVM calculation uses exact days. So you can expect it to be off by a few cents at most.

Ex: May 18 2015 to June 19 2015 would be 91 days. Accrued interest will use 89 days by counting each month as 30 days hence the 30/360 computation.

@sinep is asking the same question I am, which has not been properly addressed yet in this string. The question is:

Why is Present Value (PV) different than Present Value Flat (PVflat)?

(PVfull) includes accrued interest, this is understood. The difference between 30/360 and actual/actual day counting is understood. Neither of these explanations show why PVflat does not equal PV.

Please advise, with an example would be great, if anyone actually knows the answer.

Thanks,
KW

Self answered -
PV is PVfull and PV flat on the first day of the period.
PVflat is the evolution of PV on later days of that period. Both PVfull (with accrued interest and PVflat without evolve to different values as the period goes by, while PV continues to represent the first day of the period (When they are all the same).

Sweet