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September/December 2017 Q1 – Conejo

This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.

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January 21, 2018 at 8:25 am #431774
chiau
Participant
- Topics: 20
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Dear John,
In b) we are required to estimate the Macaulay duration of the new bond in 2 alternatives.
In the second one, however in the examiner´s answer, the denominator used was the face value of the bond (100) instead of the Sum of the PV´s of the cash flows (101.24)
Can you please check and help me?
Regards
January 21, 2018 at 10:52 am #431798
John Moffat
Keymaster
- Topics: 57
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With a coupon rate of 3.57%, the PV’s of the interest and redemption will be equal to the current face value (as shown in appendix 1 of the answer).
January 21, 2018 at 4:26 pm #431845
chiau
Participant
- Topics: 20
- Replies: 35
Yes John that is the case when we pay annual interest and redemption in year 5. However when we make fixed annual repayments of capital and interest the sum of the PV´s is 101.24
January 22, 2018 at 10:15 am #432010
John Moffat
Keymaster
- Topics: 57
- Replies: 54500
It is simply due to rounding. The calculated the annual repayment, the examiners answer has calculated the annuity factor to be approximately 4.51, whereas is is actually 4.506 🙂
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