CFA mock Morning Q17

badonkus

Hi guys,

In the Q17 I can't understand why the bond price value at the period t+1 in not discounted, but only the average of values is taken. This is incorrect, if is use a binominal tree.

Thanks!

RMontgomery

You might want to review this section, especially if you think CFAI is 'wrong'

redskins44

I was not able to get this value either, but I got something like 102.9

thecfawannabe

I'm only saying that either I'm missing something, or the answer sheet is incorrect.

Analyze_This

??? It is discounted... and then averaged.

profil

My question, why would the price be greater than the call price? Don't you mark it down to the call price if the price you calculate is greater than the call?

ayodayo

in the question, it says that it can be called 1 year from today. so that justifies why it wouldn't go down to 101 today because it can't be called yet.

my question on this question is why are the rates in year 3 not used? the answer starts the calculation directly from the rates in year 2...did i horribly miss something?

any help appreciated. thanks.

b_sea93

Gotcha. I hate when they add in that one little sentence (can be called one year from today) that throws you off. Good thing 101 wasn't an answer choice haha

DSquaredSlim

Backwards induction man...don't need to use rates in the final year. You know the final year value of the bond. Unless I'm totally misunderstanding what you're saying. Go review CFAI Reading 56 Questions 27-32, that helped me out a ton.

alanfung86 Wrote:
-------------------------------------------------------
> in the question, it says that it can be called 1
> year from today. so that justifies why it wouldn't
> go down to 101 today because it can't be called
> yet.
>
> my question on this question is why are the rates
> in year 3 not used? the answer starts the
> calculation directly from the rates in year
> 2...did i horribly miss something?
>
> any help appreciated. thanks.

Kapie

The rates in the boxes are forward rates. The bond is 3 years. So use one year forward rate (today) and two more years forward.

Hope this may help.