A MEASUREMENT OF THE ERRORS IN INTRA-PERIOD COMPOUNDING AND BOND VALUATION |
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| Authors: | James T Lindley Billy P Helms Mahmoud Haddad |
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| Institution: | University of Alabama, Tuscaloosa, AL 35487.;Wayne State University, Detroit, MI 48202. |
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| Abstract: | The errors in intra-period compounding and bond pricing are widespread in textbooks, and they also periodically occur in published research. This article deals with the measurement of error and the magnitude of error when, given the market price of other than annual bonds, the yield to maturity is calculated using the incorrect formula. The authors demonstrate that the errors are (1) the result of confusion, not oversight, (2) large in magnitude when the effective yearly interest rate is high, and (3) not symmetrical; that is, the characteristics of the errors when determining yields, given bond prices, differ from the characteristics of the errors when determining bond prices, given interest rates. |
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