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Hi John,
Would you mind explaining the calculation for how 3.57% interest arises on the coupon for the new bond.
I understand the PV of all payments = amounts borrowed, and so we can use the annuity factors ie AF*R=100. I’m probably just being really stupid, but how did they get to 4.5665R on the annuity table? I can’t work that simplification out at all
Thanks,
It is not an annuity factor.
It is the total of 1/1.0220 + (1/1.0251)^2 + (1/1.0284)^3 + (1/1.0325)^4 + (1/0,0362)^5 from the previous line of the answer.
Is there a simple way of doing this simplification, because I’m struggling with it
If you mean is there a quick way of getting the 4.5665, then I am afraid there is not.
You have no choice but to calculate the discount factor for each of the years at the different rates of interest, and then add them up.
It obviously does take time, but it is worth practicing using the brackets on your calculator because that does save a bit of time. Also, appreciate, that provided it is clear what you are trying to do, then just making a mistake in arriving at the total will only probably lose you half a mark (and you would still get full marks for then using your figure in the right way), so it would not be worth spending over-long on it 🙂
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