Module 44.2: Spot Rates and Accrued Interest

Question 1

How do you calculate the PV of a bond using spot rates for future cash flows?

Answer 1

amount of cash divided by the spot rate to the nth power, for example year 3 would be to the third power.

Question 2

What is the formula to calculate the full price of a bond including accrued interest if you’re settling between coupon payment dates?

Answer 2

PV * (1 + YTM / # of coupon periods per year) ^ t/T

t = number of days since the last coupon payment
T = number of days in the coupon period.

Question 3

How do you calculate accrued interest?

Answer 3

Coupon payment * (days since last payment / days between payments)

Question 4

What is matrix pricing?

Answer 4

matrix pricing is a method of estimating the required yield-to-maturity (or price) of bonds that are currently not traded or infrequently traded.