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Sep Dec 2017 Hybrid Q1 b (i)
I’m kind of lost with this new techniques in the answer
1.I see that the coupon cash flows were simply multiplied by the government yield rates + basis. Is this how we deal with bond valuations with varying year-to-year rates of return? Why weren’t they discounted instead?… like F9?.. and what’s with the exponential minus powers?
2.You explained how to work out Kd and MV of bonds but I don’t really understand how the model answer calculated coupon rate. Kindly help clarify.
Thanks as always.
1. You should know by school, that something to a minus power is the same as 1 / the same thing to the positive power. (So 5^(-2) = 1/(5^2) ). It is easier for the ACCA to type it that was in the answers.
So they have discounted the flows, and the rate they have used each year has been the relevant rate from the government bonds.2. The market value of the bonds is the PV of the future flows, discounted at the relevant rate (as written above). So the answer has let the coupon rate be R and then done the arithmetic to calculate what R is.
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