In CFA institute Study material end of chapter question # 13 & 14 under arbitrage free valuation (Reading 36), the computation of bond value is not consistent. In q 13 the coupon amount is not included, however in q 14 it is included. Can someone explain the reason?
The computation of the bond value _ is _ consistent.
However, in question 14, at each node you have a bond _ plus a coupon payment _. You compute the value of the bond by discounting the high and low values and averaging them, then add the value of the coupon.
so shouldn’t the same logic apply in Q13 as well? why isn’t coupon payment included in computing bond value? I don’t know if I’m missing something basic.
At each node you have a bond and you have a coupon. The value of the bond is the value of the bond, and that’s computed the same way in question 13 as it is in question 14. The difference is that in question 14 you need the value of the bond plus the value of the coupon at each node: that’s the total value that you’re discounting. In question 13 they didn’t ask you for the total value at a node; they asked you only for the value of the bond at that node.
oh got it! thanks!
My pleasure.