Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Bond valuation and yield to maturity

- This topic has 1 reply, 2 voices, and was last updated 11 months ago by John Moffat.

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- March 9, 2022 at 8:40 pm #650580
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?

March 10, 2022 at 7:21 am #650713The 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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