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?