CFAI Texts: Book 6: P. 120: Question 4: A $1 face value bond pays an 8 percent semiannual coupon. The annual yield is 6%. The bond has 10 years remaining until maturity, and its price is $1.1488. Consider a futures contract calling for delivery of this bond only. The contract expires in 18 months. The risk-free rate is 5 percent. A. Compute the appropriate futures price. Ok, I get the calculation. But it appears that the annual yield is 6% was just thrown in there as a distractor. Is there any similar situation or calculation of futures value that where the annual yield would become important to the equation, or can I just ignore in similar futures problems. Also, just to be sure I’m understanding this, annual yield is the annual value of change in the spot price plus coupons recieved over the current spot price of the bond? Is that correct, I plan on spending alot of time reviewing fixed income, I’m much stronger in equity for some reason. Basically what is the formula for annual yield, and in addition, is annual yield the same as the implied rate of return or implied repo rate. I was doing so good, then all at once I got very very confused and unlearned everything.
Oh, cmon, someone throw me a bone here.
i’ll try to help you out once i get there…should be sometime in the next 24 hrs (i’m at page 85).
Black Swan Wrote: ------------------------------------------------------- > CFAI Texts: Book 6: P. 120: Question 4: > > A $1 face value bond pays an 8 percent semiannual > coupon. The annual yield is 6%. The bond has 10 > years remaining until maturity, and its price is > $1.1488. Consider a futures contract calling for > delivery of this bond only. The contract expires > in 18 months. The risk-free rate is 5 percent. > > A. Compute the appropriate futures price. > > Ok, I get the calculation. But it appears that > the annual yield is 6% was just thrown in there as > a distractor. I agree. Presumably that 6% corresponds to the price of the bond given in the next sentence. > Is there any similar situation or > calculation of futures value that where the annual > yield would become important to the equation, or > can I just ignore in similar futures problems. It’s irrelevant if they give you the price unless it’s a much more difficult question about “cheapest-to-deliver” bonds which is a hard level III topic. > Also, just to be sure I’m understanding this, > annual yield is the annual value of change in the > spot price plus coupons recieved over the current > spot price of the bond? The annual yield is the yield to maturity on an annual basis. The ytm is that number that discounts the cash flows so that the discounted cash flows = market price. > Is that correct, I plan > on spending alot of time reviewing fixed income, > I’m much stronger in equity for some reason. > Basically what is the formula for annual yield, > and in addition, is annual yield the same as the > implied rate of return or implied repo rate. The implied rate of return is a lot like the ytm except it applies to things like equities. It would sound weird to say that a bond has an implied rate of return of 6% (although I would know what you meant, I guess). The implied repo rate is something pretty different and is an implied interest rate that is being used by the futures market (or I suppose other derivatives markets). The idea is that about the lowest interest rate that market particpants can both lend and borrow money at is the repo rate (not the T-bill rate for example) so the no-arbitrage interest rate should be near the repo rate. It no longer really means anything connected to the repo rate but is just the no-arbitrage interest rate implied by the spot price and the price of derivatives. > I > was doing so good, then all at once I got very > very confused and unlearned everything. You’re doing fine…