Hi all, in part b of this question, i do not understand why we multiply the coupon and redemption payments by PV assets/Price - please could someone explain this? Many thanks
Hi Molly, just to clarify, is it Question 9 part (ii) in the end of chapter questions that you are looking at? (I can't see a part b for Q9). Thanks, Richie
No worries. Does your query relate to the calculation for the DMT of bond A, and in particular why we have 'A/90.288' in the numerator? If so, A/90.288 is the number of that bond (bond A) that we have determined to be purchased. The bit of the formula in brackets is the PV of coupons and redemption from one bond, and so this need multiplying by the number of bonds actually purchased (A/90.288). I hope this helps, Richie
Hi Richie, Thank you so much for your response, is there a particular reason that we did that in this case? ie is there something specific in the question that requires this or is it because we do not know the amount to be investment? I haven't seen this before in a bond question, although i assume now that i must have been looking at situations when only one bond has been purchased. Also how comes we do not do this for bond B? Thank you
Hi Molly, It is needed here for the DMT cashflows as we are comparing assets and liabilities, and so we need to be consistent. Ie if we are looking at the actual amount of liability cashflows, we also need to consider the actual amount of asset cashflows, rather than just the cashflows from a single asset (or bond). We don't need to do it for bond B as that is a zero coupon bond. For bond A, A/90.288 is the number of bond A (each of 100 nominal) that we buy. Bond B is just a zero coupon bond paying 100 nominal at redemption, so the PV of the investment in bond B (B) is already the number of those 100 nominals that we can buy. Thanks, Richie
