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Futures/forwards annually vs continuously compounded rates

B

Benjamin

Member
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.
 
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