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Hi John,
Confused with question in Kaplan revision kit.
Q. Company B, a forestry company, is looking to raise $5 million through the issue of 6 year deep discounted zero rated bonds. The issue price has been set at a 40% discount. Kevin may invest but is looking for a return of 10% per annum to do so.
Calculate the gross redemption yield on the deep discounted bonds?
A. 60 x (1+r)^6 = 100
1+r = 1.0889 (how did they work this out line out?). What happened to the ^6 when the 1+r was brought over to the left hand side?
r=8.9%Thanks
GrahamI assume that you are happy with the first line
60 x (1+r)^6 = 100
Dividing both sides by 60 gives:
(1+r)^6 = 1.6667
Therefore 1+r = the 6th root of 1.6667 = 1.0889
Hi John
I assume that if there is a 40% discount now he pays 60 and then will get back the nominal of 100 in 6 years and that’s where the 60 comes from?
Also, thanks very much for the clarification on the equation
Graham
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