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bond pricing discount

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › bond pricing discount

  • This topic has 5 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • July 25, 2020 at 3:38 pm #577980
    qawsedrf
    Member
    • Topics: 4
    • Replies: 3
    • ☆

    sir, for example,

    3yr semi-annual Bond Face value = 5m
    nominal rate = 10%
    market rate = 12%

    It appears I cant use discount method like this

    250000/1.12^0.5 + 250000/1.12^1 + 250000/1.12^1.5 …

    But i have to do like this

    250000/1.06^1 + 250000/1.06^2 + 250000/1.06^3 …

    why cant i use the above method? i see it is not wrong.

    July 25, 2020 at 4:04 pm #577982
    qawsedrf
    Member
    • Topics: 4
    • Replies: 3
    • ☆

    https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/international-project-appraisal.html

    I saw this TA and learned that 6 months can be discounted using ^0.5

    July 25, 2020 at 5:57 pm #577995
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Yes – using ^0.5 etc is the correct method 🙂

    July 26, 2020 at 2:42 am #578069
    qawsedrf
    Member
    • Topics: 4
    • Replies: 3
    • ☆

    But sir, n=number of periods and if i use 0.5 method for bond calculation, it is wrong. I would like to know why we cant use 0.5 method to find issue price of bond, when it seems very acceptable for me.

    July 26, 2020 at 2:51 am #578070
    qawsedrf
    Member
    • Topics: 4
    • Replies: 3
    • ☆

    Does this mean that, since n = number of periods, the discount rate for 6months in Technical article above should be as (1/1.06^1)? 

    July 26, 2020 at 9:32 am #578087
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    But the answer in the article does use ^0.5 to do the discounting for 6 months, as I wrote in my previous reply.

    The discount factor for 6 months (half a year) is 1/1.12 ^0.5

    The discount factor for 18 months (1.5 years) is 1/1.12 ^1.5

    and so on.

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