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Dear sir
I have been trying this question but i cannot calculate the yield due to new ratings
The answer in the kit book is very confusing how new market value of bond is calculated ?The new bond has an coupon rate of 8% and is redeemed at a premium of 2%
Therefore, on $100 nominal, the future flows are:
1 8
2 8
3 110 (i.e. 8 + 102).The market value is determined by discounting these flows at the the relevant government yield curve rates for each year (as calculated earlier in the question) adjusted by the new credit spreads.
Having calculated the market value (of 102.70), the yield to maturity under the new credit rating is calculated as the IRR of the flows in the normal way.
Sir do you explain this in any of your lecture this type of question?
Im trying my best to learn it through technical articles but this is something new i thinkArriving at the YTM of redeemable debt by calculating the IRR is certainly not something new, and is covered in our free lectures for AFM (and for Paper FM as well).
Sorry, I misunderstood your original question because it seemed to you were asking just about calculating the YTM for the new bond (and I assumed that you were therefore happy with the earlier parts of the answer).
There is no specific lecture on this (although the yield curve is explained) because this is the only time that this has been asked in the exam. I will add a lecture when I have the time.
However, it was covered by a technical article:
If after working through the article you have any questions on the figures in the examiners answer to this question, then obviously do ask.
(Appreciate that although all the technical articles are good and all worth studying, they do not pretend to cover the entire syllabus 🙂 )
Thank you sir i tried the article thoroughly and after that i tried the exam question and i got a hold of the mark schemes answer i think
So sir everytime examiner in the exam tells us about government yield bonds and credit ratings we take on this approach if certainly asked in the future
And for the other questions we take on your approach in the free lectures ?
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