Hi, Reference: Ch11 in general Could you please clarify under which circumstances an annually compounded rate should be used, vs. continuously compounded. My understanding is: - Coupons are calculated using annually compounded rates - Discounting is done at continuously compounded rates Is that correct?
Not really. Coupons are expressed as a percentage of the nominal, payable at the specified frequency. Eg £100 at 5% payable half yearly = two payments of £2.50. Discounting is done using the relevant rate. Eg spot rates are typically continuous, bond yields are compounded at the relevant frequency eg i(2) for half-yearly.
