Carrying Value of Bonds

CFA Level I Fixed Income
#1

In reading #55 we are calculating carrying value of a bond.

I understand we are taking the future value of the bond at a future year, while adding the coupon/reinvestment income.

Example:

6% coupon, 3 year annual pay bond, bond purchased with YTM of 5, sold at end of year 2 with YTM of 5

Price at sale (at end of year 2, YTM = 5%)

N = 1, IY = 5, FV = 1000, PMT = 60, CPT PV = -1009.52

Why do we only use N = 1 instead of N = 2 for this calculation? If we are seeking the price at sale at end of year 2, isn’t that two periods?

#2

Moving on in the chapter we are looking at a similar example.

Consider a three year 6% bond purchased @ par by an investor with a one year investment horizon. If ytm increases from 6% to 7% after purchase and the bond is sold after one year, the rate of return can be calculated as follows:

Bond price just after 1st coupon has been paid with YTM = 7%

N = 2, IY = 7, FV = 1000, PMT = 60, cpt PV --> -981.92

Why is N = 2 when are we looking at the bond price just after 1st coupon was paid out? Shouldn’t this be N = 1?

The Kaplan book did not indicate in this chapter so far that they are using BGN mode but to me that is what seems necessary for these examples.

#3

The bond price a the selling time is the PV of the remaining cash flows , i.e. only the remaining years until maturity are relevant. If the total lifetime is 3 years and you sell the bond after one year the buyer will still receive coupons for two years (N=2) plus the principal at maturity which is on what the selling price is based on. Draw a timeline and it should become clear.

Regards,

Oscar

#4

Thanks Oscar!