Future Value of Coupons

CFA Level II Derivatives
#1

Hi everyone,

I just came across example 4 of Reading 48. The solution calculates the future value of the coupons based on the 7.5 percent annual yield. My question is: Why not use the risk-free rate of 7 % and calculate the FV of the coupon like this:

FV = 4.0 * 1.07^(0.5) + 4.0 = 0.0814

Thanks for the help.

#2

you would calculate future value based on the applicable Yield - not on the risk free rate.

#3

It is an error in the book.You should use risk free rate to calculate PV or FV of cashflow to get the right future/forward price. (see Volume 6 page 27.)