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part(a)
my workings to the yield rate before spread is valid or not ??
1st bond kd=9/104*100% = 8.6%
2nd bond kd=7/102*100%= 6.9%
3rd bond kd=6/98*100%=6.1%I don’t understand what examiner did , and what formula or technique he used to solve this part below , please sir i need your assistance in this part,thanks.
Bond 1: $104 = $109/(1 + r1)
r1 = ($109/$104) – 1 = 4·81%
Bond 2: $102 = $7/1·0481 + $107/(1 + r2)2
r2 = [107/(102 – 6·68)]1/2 – 1 = 5·95%
Bond 3: $98 = $6/1·0481 + $6/1·05952 + $106/(1 + r3)3
r3 = [106/(98 – 5·72 – 5·35)]1/3 – 1 = 6·83%What you have done is not valid – you have ignored the redemption at par in each case! What you have done would only be valid if they were all irredeemable bonds.
You will know from the lectures that the market value of a bond is the PV of the future receipts discounted at the investors required return.
In the case of bond 1, the market value is 104, and because it is redeemable in 1 years time, the receipt in 1 year will be 100 + 9 = 109.
Therefore, if the return is R, then 109 x (1/(1+R)) = 104.
Therefore 1+R = 109/104 = 1.0481, there R = 0.0481 or 4.81% (which is therefore the 1 year rate).In the cash of bond 2, the market value is 102, and because it is redeemable in 2 years time, the expected receipts are 7 at time 1 and 107 at time 2.
If the 2 year rate is R (and we know the 1 year rate is 4.81%), then:
102 = 7 x (1/1.0481) + 107 x (1/(1+R)^2)
Therefore 102 = 6.68 + 107 / ((1+R)^2)
107 = 95.32 x (1+R)^2
(1+R) = sq root of (107/95.32) = 1.0595
R = 0.595 or 5.95% (which is therefore the 2 year rate)It is the same logic for bond 3.
Sir just like in lectures for redeemable , we were working out the yield by using the I.R.R but that could be time consuming exercise which i worked out.
this is the best way of working out which you explained above and it is clear to me know
thank you very much sir
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