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Paid in Advance or Arrear

Discussion in 'CT1' started by paryas.bhatia, May 15, 2014.

  1. paryas.bhatia

    paryas.bhatia Member

    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.
     
    paryas.bhatia, May 15, 2014
    #1
  2. deepakraomore

    deepakraomore Member

    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
     
    deepakraomore, May 16, 2014
    #2
  3. paryas.bhatia

    paryas.bhatia Member

    So that means in this question we have a choice?
     
    paryas.bhatia, May 16, 2014
    #3
  4. playful27

    playful27 Member

    Yes, you have a choice and you will not be penalized.
     
    playful27, May 17, 2014
    #4

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