Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › bond pricing
- This topic has 4 replies, 3 voices, and was last updated 7 years ago by John Moffat.
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- May 31, 2016 at 12:32 am #318229
A very good very early morning to u….
so, the next question dealing with bonds is #30, Levante.
the scenario is the that a 5 year 150m bond needs to be issued and it gives 2 options on how to do it and we have to comment and advise.
option (ii) states: “issue the new bond at a coupon rate where the issue price of the new bond will be $100/unit and equal to its par value.”
so when i read it, it appeared rather simple: just keep the YTM=coupon rate.
but how to choose the YTM since we are given spots/spreads for years 1-5? i simply chose the 5 year Rf and added the credit spread which gave 6.12.the answer computes the YTM thru trial and error. it does give an explanation as to why he is doing this but i dont get it … pls explain
by the way, my answer was 6.12% and his answer was 6%..am sure mine was a fluke since what i did doesnt make sense.. or does it?
regards
May 31, 2016 at 1:41 am #318230AnonymousInactive- Topics: 43
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Im not sure if the way i approached this is correct but what i did was find the IRR…..without considering tax.
SO at 6%
5*4.212=21.06
100*0.747=74.7
Total=95.76 less MV 95.71=0.05at 7%
5*4.100=20.50
100*0.713=71.30
Total=91.80 less MV 95.71=(3.91)IRR= 6+0.05/3.96*1=6.01%
May 31, 2016 at 7:27 am #318281What Stafano has done is fine.
I guess, Mansoor, that you did it the same way but with different guesses. If that is the case then that would explain a slightly different answer (which does not lose marks).
May 31, 2016 at 4:28 pm #318460thank u… but i do have one last query on this:
what is the logic behind choosing 5% coupon rate in getting the irr?
it is explained in the answer but i still dont understand
May 31, 2016 at 5:24 pm #318468In arriving at the IRR you can use any two guesses that you want to. The answer may be slightly different (because it is not linear) but it still gets full marks.
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