Need clarification

Options & Futures
1

Course Name: Python for Trading: Basic, Section No: 3, Unit No: 6, Unit type: Quiz



If a $1000 face value bond has 5% coupon rate with quarterly payments and if the coupons are reinvested at 5%, then how its future value can be $1050.95 and not $1101.89?

2

Hi Shubham,



5% Coupon rate with quarterly payments means every quarter you are getting 5% divided by 4. Reinvestment means that it is getting compounded (quarterly).



So for $1000 investment, the formula comes out to be as:



1000 * (1 + (0.05/4)) ** 4



(0.05/4) –> Coupon rate for the quarter

** 4 –> 4 quarters in an year



This comes out to be ~$1050.95.



Hope this helps!

3

Thanks for the clarification. I thaught that it is like bond valuation where we also reinvest coupon. Got carried away by the word "reinvestment".

4

Hi Shubham,



Glad to know that helped!



Yes, it is as different as finding the future value of the bond or pricing the bond (finding present value from coupon rate and face value).



Thanks,

Gaurav