Dear All, Please refer to Fixed Income: Arbitrage Free Valuation Framework> solution to 10 B. At the end of year 3, cuopon is added to the Cashflow; However it has not been discounted. As per my understanding, Time 3 cash flow will be 106 only…why cuopon of 6 will be again added to 106? Is it for beginning year of cuopon payment? Please , help me to conceptualize the problem. I wait for CFA Errata for this problem…But nothing came out…Finally, i come here to find the right answer.
Have n’t anyone seen this problem. I need immediate help. Thanks in advance.
There’s nothing wrong with the problem; it’s the notation that’s the problem.
When they write Year 3 , they mean the value at _ the beginning of _ year 3: the $106 cash flow at the end of year 3 is discounted one year, and the $6 coupon at the beginning of year 3 (end of year 2) is added.
Note that they stop the calculation with Year 1: the value at the beginning of year 1, which is the value today.