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Is the yield to maturity the same as the investors required rate of return?
I remember in paper FM, if we want to calculate the investors required rate of return, we will use the IRR formula to calculate the rate % and the investors required rate of return will determine the market value of the bond
But in question AFM Toltuck Co (June 2017), each year the percentage is different and market value of the bond is calculated by discounting it using the government yield plus spread, then only calculated the yield to maturity (IRR)
In paper FM, the discount factor % used each year is always the same as yield to maturity? Why in AFM is different?
The MV is the PV of the future receipts from bonds.
In Paper FM we assumed that the investors required return would remain constant and discounted all the receipts at the same rate. In Paper AFM we take into account that the required return will change over time.
The yield to maturity is the overall return to investors and is the IRR in the normal way.
The technical article on the ACCA website on “Bond valuation and bond yields” explains all this with examples.
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