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Bachatero2014

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I need some help this problem is driving me crazy. I KNOW I’M RIGHT! …..or maybe not. It may be a good indication on whether or not I know what the hell I’m doing.
Anyways Reading 47 Forwards, page 31, Example 3 BB, it asks to value fixed income forward at some point in time after inception and before expiration of the contract. I follow the formula Vt (0,T) = St -PVof C - F(0,T)/(1+r)^(T-t).
The (T-t) is where I’m getting the problem wrong. I go T= 731-150= 580/365= 1.5917.
Then t = 731-515= 216/365= .5917
T-t= 1 but the book ignores rasing to (T-t) and only raises to t please help
 
I don’t understand your last line. If you can clarify what you mean, I’ll be happy to take a shot at it.
 
I don’t have the book with me right now but maybe I can help.
In your last sentence, when you say that the book only raises to t, is it raising the FV or PV? It could be discounting by T to get PV then moving forward by t again, which is the same as (T-t).
 
The value of the bond on 515 day is 1025.375
PV of coupons are 97.75
T-t=731-515=216
I reckon u were ok till that point now to value u create below mentioned equation as per formula u already know
1025.375-97.75-(929.76/1.07 raise to the power 216/365 that is 0.59178)
So working for 1.07 raise to the power 0.59178=1.04085
Going further to get the PV of forward price= 929.76/1.04085=893.27
Now complete equation is 1025.375- 97.75- 893.27=34.355 so the long is in gain with 35.355.
I reckon the calculations are mechanical. Hope that helps in regards to calculations.
 
T is the total time when he will sell the bond that is on 731st day so T=731
t is the time elapsed so far that is 150+365= 515 days
T-t=731-515=216
Hope that clears T-t issue
 
Now I got ur last point too u r considering T=1.5917 and t=0.5917 and further doing it as T-t that is 1.5917-0.5917=1.
That is absolutely wrong.
Try to do this problem with time line.
U will be fine.
 
S2000, hei, Hardeep thanks for your interest and help. Here’s the problem if you’d like:
investor buys a 5yr semi annual bond when issued with coupons equaling $50
It is now 150 days into the life of the bond. He/She wants to sell the bond after the 4th Coupon. First C pays on 181 days, 2nd C pays on 365 days, 3rd C pays on 547 days, 4th on 730 days. Price of Bond @ 150 days equals $1010.25. RFR= 8%
Cool so then F(0,T)= 929.76. Part B: Now move forward 365 days. RFR=7%. Bond Price= $1025.375. What is the value of the bond?
So I went V(0,T)= (St - PV of C) - F(0,T)/(1+r)^T-t or (1025.375 - 97.75) - 929.76/1.07^ AHAH MY HICCUP!
Finally I see that T= 581/365 or 1.59 and t = 365/365 or 1 so T-t= .59. Just screwed up with that damn little t last night :/
HardeepK your way of finding T and t is a new approach for me thanks for the insight!
 
Glad you got the answer. I follow the curriculum approach to find T-t. May be my approach is touch different however try to do time line. I always do that and I was fine.
 
I believe S2000magician is the genius who will certainly help with that.
Over to you S2000magician sir.
 
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