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Hi,
I am currently doing GNT Co as a question on Bond Duration however I cant see why you go with 4% as the Discount Factor.
The Solution tells you to try 5% then try 4% but I don’t understand why, what determines the rate you choose?
I went with 4% DF and the end result is the same as the solution but the solution appears long winded.
I just need to understand why I go with 4%?
Thanks
When calculating the gross redemption yield (the return to investors) then we need to calculate the IRR as normal (this is nothing directly to do with the duration, even though we need to know the GRY).
As always when calculating the IRR, we need to make two guesses and approximate, and any two ‘guesses’ are OK – the examiner chose 5% and 4% as his ‘guesses’.
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