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August 10, 2017 at 6:32 pm #401393Olya
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Dear John Moffet!
Thanks for your great tutoring.
I failed to find anything of my concern in previous topics.
1. What i really wonder is the following. In answer for (a) part of the 36 BPP revision questions it is said that – to find current issue price we need to use yield to maturity for 1-year redemption (3.57%), 2- year redemption (4.2%), 3-year redemption (5.01%) for 4 -year bond and arrive to result of 97.24$. Does it mean that if i am an investor and i want to understand the value of the bond i imply in my cosideration that i can sell it after 1 year, 2 years, 3 years. Because otherwise i can’t understand why a 4- yaer bond should be splitted in this way as 4 -yaer bond should be valued higher than 1 -year, 2-yaer and 3-year bonds?
2. it is not too much relevant but very important for me from linguistic point of view. IN BBP revision # 30 question (airline business) answer (a) it is said that “if … to be issued at discount would not be a full take up”. I undearstand like this – when telling about discount i think that for a seller it means less return than for a buyer. And if smth is sold at discount a seller of a bond will suffer more intrest payment and the buyer will enjoy more return. And in the answer of BBP revision # 30 question (airline business) answer (a) it is vice a versa.
thanks a loooootAugust 11, 2017 at 6:36 am #401432John MoffatKeymaster
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1. The spot yields are the returns that are required over 1 year, or over 2 years etc..
So since interest of $5 is received after 1 year, then need to have earned the 1 year rate. Interest of $5 received after 2 years, they need to have earned the 2 year rate, and so on.
It does make sense that the 4 year bond is valued lower, because in the 4th year it is only giving 5% on nominal, but for 4 years they would want more than 5% so are in a sense losing money in that year.
2. The company is issuing debt and so is borrowing money. They need to make the issue attractive to buyers otherwise they will not be able to raise the total that they want. So to make sure that the raise as must as they want (i.e. sell all the debt that they are issuing) they will need to sell them at a discount (so the people lending the money – i.e. buying the debt – will end up getting a higher return and therefore are prepared to lend the money to the company).
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