Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby » Wed Sep 11, 2013 7:33 am

Can anyone please explain this formula

why we are discounting second coupon with two periods rates i.e with f1 and f2

source :FRM core reading 2013 VAR:book 4 pg 158

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm


Postby pradeeppdy » Wed Sep 11, 2013 10:26 am

We need to discount back the coupons by spot rates(S1,S2,S3.........etc) through this formula.

But we don,t have spot rates and we need to calculate that by forward rates,
So, 1+F1=1+S1, and (1+S2)^2=(1+F1)(1+F2),,,,,,,,,

That's why we discount here second coupon by (1+F1)(1+F2).

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