Ch-04 - Fixed Income Securities and Markets Chapter 4...

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1 Fixed Income Securities and Markets Chapter 4 Generalizations and Curve Fitting Overview ± Cash flow not on even six-month intervals: ± Accrued interest ± Compounding conventions other than semiannual ± Curve fitting techniques to estimate discount factors for any time horizon Accrued Interest ± On Feb. 15, 2001, consider the 5.5s of Jan. 31, 2003 (Jan. 31 and July 31 coupon payments) ± If Investor B buys $10,000 face value of this bond from investor S,
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2 Accrued Interest ± 166 days between Feb. 15, 2001 and July 31, 2001 ± 181 days between Jan. 31, 2001 and July 31, 2001 ± Thus B should receive only (166/181)X$275 = $ 252.21 of the coupon payment. ± S gets the rest: $22.79 Accrued Interest ± S should receive the rest of the coupon payment, $22.79 ± Investor B pays $22.79 of accrued interest to investor S on Feb. 15, 2001, the settlement date. ± Having paid S $22.79, investor B may keep the entire $275 coupon payment on July 31, 2001. Flat price and full price ± Quoted or Flat price: 101-4.625 ± Accrued Interest: $22.79 per $10,000 face value or .2279% ± Full price: 101+4.625/32+.2279=101.3724 ± Invoice price on $10,000 face amount: $10,137.24 (actual amount paid)
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Ch-04 - Fixed Income Securities and Markets Chapter 4...

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