Paid in Advance or Arrear

[paryas.bhatia]

A person bought a 3-year forward contract on 1st August 2013 to buy 100 nominal of stock that pays coupons of 4%p.a payable quarterly on 30th June, 30th September, 31st December and 31st March each year for ever. The stock also pays 50% nominal on 31st March 2015. The stock is priced such that it gives an effective yield of 5.5% p.a.

From the above what can we say about the coupons, i.e., if they are paid in advance or arrear? Please provide some explanation.

 

[deepakraomore]

A person bought a 3-year forward contract on 1st August 2013 to buy 100 nominal of stock that pays coupons of 4%p.a payable quarterly on 30th June, 30th September, 31st December and 31st March each year for ever. The stock also pays 50% nominal on 31st March 2015. The stock is priced such that it gives an effective yield of 5.5% p.a.
From the above what can we say about the coupons, i.e., if they are paid in advance or arrear? Please provide some explanation.

1) consider the 1st coupon on 30 June, i.e. advance then calculate the price and then accumulate the price for 1 month
Or
2) consider 1st coupon on 30 sep in advance. Calculate the price and disount it for 2 months.

I think considering advance coupon payments makes the calculation easy.

Regards

 

[paryas.bhatia]

So that means in this question we have a choice?

 

[playful27]

Yes, you have a choice and you will not be penalized.