Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

I am having a problem understanding discounted cash flows. I appreciate your patience and help. Lets say I have a bond that I want to price.

Par: $1000
Coupon Rate: %5.0
YTM: %5.0
Frequency: Semi-Annual – 2 (Paid on: 6/30/20XX,12/31/20XX)
Settlement Date: 8/15/2013
Maturity Date: 12/31/2014


12/31/2013  6/30/2014   12/31/2014  6/30/2014   12/31/2014
      25        25        25          25           1025

This is the formula I know used to discount cash flows. CF/(1+r/n)^a, where, as I understand it, a=n*t. My question is when valuing bonds I have seen people using the typical a=1,2,3,4,…,n*t I have also seen formula’s where a=.5,1,1.5,2,2.5 when discounting semi-annual cash flows. I have also seen people using # of days a=280 for example when the cash flow is some arbitrary date.

For such a simple formula, this unbelievably complicated. Can someone please just explain to me how to find “a” . Is there a comprehensive formula I could use that can discount any cash flow no matter what the date is? Eg. Today is 03/14/2009 and the CF is due on 07/2/2010 for the same info above what would a be?

share|improve this question
2  
can you maybe work a bit on your accept rate? Most 15 out of your 18 questions are having answers of which none you chose. It is hard to motivate others to help you if there is no feedback given by you whether any of the posts answered your question...just my 2 cents... –  Matt Wolf Aug 15 '13 at 15:55
    
Really Sorry Matt. I am still new to the forum. I promise to go back and check off one's where my question was answered. Appreciate your patience and help. –  jessica Aug 15 '13 at 16:23
    
The conversion between the dates and the year fraction is determined by the day counting convention you use. The following document explains this in more details: marchioro.webs.com/White-papers/… –  Vincent Zoonekynd Aug 16 '13 at 9:19
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Browse other questions tagged or ask your own question.