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Re: possible bug in convert pricer: when notional is not 100

Posted by P Nelnik on Jul 15, 2010; 4:40am
URL: http://quantlib.414.s1.nabble.com/possible-bug-in-convert-pricer-when-notional-is-not-100-tp8674p8675.html

Thanks  David.


On Thu, Jul 15, 2010 at 12:17 PM, David Klein <[hidden email]> wrote:
As I mentioned before, I am not really familiar with Quantlib, but I am familiar with convertible bonds.

Where are two different (related) concepts. "Notional" (aka "face value") and "redemption". Convertible bonds are typically quoted on a percent of notional basis, so a bond with a notional of 1,000 and a price of 110 would be worth 1,100 units of currency. Convertible bonds also typically redeem at 100% of notional, so at maturity one receives the coupon plus the notional. What I am guessing is happening in Quantlib is that by changing the redemption to 1,000 you have setup a bond with the following structure:

Notional = 500 (or any other number, not really relevant since the returned price is in percent notional)
Redemption = 1000% (of notional. I.e. a cash amount of 5,000)
Coupon=10% (of notional, I.e. a cash amount of 50)
Present value approximately 1010% (of notional, I.e. a cash amount of 5050, assuming one year to redemption)

So 1010 is the correct value.

P.S. A redemption other than 100% is called a non-par redemption. They are very common for zero coupon CBs, rare otherwise.
P.P.S. Feel free to post reply to the mailing list.



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