Fixed Income - Accrued Interest buyer, interest, payment, present

ShooterMcCFA

According to the text book, when you calculate the present value of the future cashflows so as to arrive at the full-price (dirty price) that the buyer has to pay, you have to raise (1+discount rate) to the power of (fraction of time from settlement to next coupon payment). That means this is done on a continuously compounded basis isn't it?

But on the other hand, the accrued interest = coupon rate times x (1 - fraction of time from settlement to next coupon payment). It seems to me that this is done on a simple basis.

One is continuously compounded, one is simple. Isn't this inconsistent?

I sense that I'm missing something here. Any ideas anyone?



Edited 1 time(s). Last edit at Monday, October 26, 2009 at 12:46AM by pamarro251.

mnieman

By the way, how do I choose to follow or subscribe to a thread? Sorry guys I'm a rookie here

scr879

Thanks revenant. As a matter of fact I think I didn't phrase my question very clearly.

But you know what, I just found out that the calculation of accrued interest/clean price is actually not included in reading 64's LOS. Doesn't that mean you don't need to care about this anymore? Haha! Woo hooo!