Hello Everyone, The question is - A bond pays coupons in perpetuity on 1 June and 1 December each year. The annual coupon rate is 3.5% per annum. An investor purchases a quantity of this bond on 20 August 2009. Calculate the price per £100 nominal to provide the investor with an effective rate of return per annum of 10%. I calculated the price assuming that payments are made in advance. In this, you have to calculate the price at 1 June 2009 and then accumulate by 80 days to get the price as at 20 August 2009. But the examiner's report has the price (as at 1 June 2009) calculated with i^(2) rather than d^(2)? Do we have to assume payments in arrear unless the question specifically mentions 'payments in advance'? I assumed that 'the year' in this question starts at 1 June 2009. Cheers Nish
You have enough information as is. If you buy the bond in August, the first coupon is in December. Looking at it from June, the first coupon (Dec) in at the end of the 6mths. Otherwise generally you're safe to assume things like bonds are payable in arrears (doesn't really make sense to get back a coupon just as you pay the principal), and in advance for things like pensions and premiums.
Hi didster, I am clear now. I would remind myself to read the question again so to not miss the obvious. Cheers! Nish
