K
Kchapman22
Member
Hello please could the method for the following be clarified.
Question: one year ago the government issued a 10-year index linked bond. Coupon and redemption payments are indexed by reference to the value of the inflation index with a time lag of 3 months. Coupons payable quarterly in arrears. Nominal coupon rate is 6% pa.
Three months before the bond was issued, the value of the inflation index was 256.0, at the issue date it was 257.2 Three months after it was 258.5. since then the rate of inflation has been 1.2% per quarter effective.
Calculate the amounts of the first 3 coupon payments received by the investor who purchased £10,000 nominal of the bond 4 months after it's issue date.
Method I took: calculate the index value at time 4 months since it is a quarterly arrears paying bond so coupon would be at time 7. Then found out the lagged index to be the index at time 4 (this was then calculated to be 259... By using the 1.2%^(1÷3) effective from 258.5. nominal coupon was £150. When I calculated by setting the denominator to be base of issue lagged three months (256) it gave a different answer to what is in the book. Answer to receive is £151.46 however mine was not this.
After emailing CAA global about it they provided the worked soution saying coupon is received 2 months after purchase but how can this be right since coupons are payable quarterly in arrears so end of three months?
Please advise
Thanks
Question: one year ago the government issued a 10-year index linked bond. Coupon and redemption payments are indexed by reference to the value of the inflation index with a time lag of 3 months. Coupons payable quarterly in arrears. Nominal coupon rate is 6% pa.
Three months before the bond was issued, the value of the inflation index was 256.0, at the issue date it was 257.2 Three months after it was 258.5. since then the rate of inflation has been 1.2% per quarter effective.
Calculate the amounts of the first 3 coupon payments received by the investor who purchased £10,000 nominal of the bond 4 months after it's issue date.
Method I took: calculate the index value at time 4 months since it is a quarterly arrears paying bond so coupon would be at time 7. Then found out the lagged index to be the index at time 4 (this was then calculated to be 259... By using the 1.2%^(1÷3) effective from 258.5. nominal coupon was £150. When I calculated by setting the denominator to be base of issue lagged three months (256) it gave a different answer to what is in the book. Answer to receive is £151.46 however mine was not this.
After emailing CAA global about it they provided the worked soution saying coupon is received 2 months after purchase but how can this be right since coupons are payable quarterly in arrears so end of three months?
Please advise
Thanks