Why do they take -4 in pmt? First time I see this phenomenon.
They are taking the viewpoint of the seller: receive 85.4734 (+ sign) today, pay out annual coupons and face (- signs)
P/Y=C/Y=1
FV=-100, then compute I/Y. (this is your YTM, which is 7.6 percent)
Modified duration = Macaulay/(1 + YTM)
= 4.5947/1.076
= 4.27016
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How do you know that they take the viewpoint of the seller? They don’t write that…
For the TVM and CF worksheets, cash inflows are positive, while cash outflows are negative. You have to take the viewpoint of one side of the deal (either buyer or seller) and apply it consistently.
In your example above, we could also take the viewpoint of the buyer, so PV would be -85.4734 PMT 4 and FV 100. You would still get I/Y to be 7.6 percent.
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Alright, that makes sense. I got the right rate now and the right duration.
Tricky stuff but I hope I will comprehend everything until testday in February.
Thanks again for great help!!!
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