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Appendix 2 when calculating the Macaulay duration, can I discount the coupon using yield rate which is 3.57 instead of the spot yield rate?
Thank for your time.
3.57% is the coupon rate, not the yield rate, and so discounting at that rate would be wrong.
But if the price of the bond is at 100, shouldn’t coupon rate = yield rate?
Further, referring to June 2014 question 1 c, the Macaulay duration is calculated discounting at the yield rate which is 2%.
Can you please explain this?
The overall yield (in a sense the average yield) will be 3.57% (not because the price is $100, but because the redemption is the same amount as the current market value).
Discounting at 3.57% to get the Macauley duration would not lose all the marks, but it should strictly be at the spot yield rates for each year.
The June 2014 question is an easier version in that we do not know the spot yield rates and can therefore only use the overall/average yield.