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In calculation of the coupon rate , I do it this way :
(1) Calculate the Market Value assuming :
Interest at the risk free rate of 5% – (5/100 times $100(which is what Debt is usually quoted at) and discount @ 13% for five years) = 17.6
In year 5 Redeem $100 and discount at 13 % = 54.3.
Market Value = 71.9 (17.6+54.3)
(2) Then Compute the IRR using the 10 % and 20 % Discount rate which gives 13.5%.
The coupon rate = 13.5% less the 5%( use as the interest rate assumption in calculating the Market Vale & IRR) give my answer as 8.5 %. ACCA answer is 6.62%.
kindly advice if this approach is acceptable to compute the coupon rate.Yes, your approach is OK and would get most, if not all, of the marks (although the examiners answer is perhaps more accurate).
As a side issue, I would not spend too much time on this exam paper. It was the previous examiner, and some of his questions (and some of his answers!) were ridiculous. That is why he is no longer the examiner.
The current examiner took over in June 2010 and your time is best spent on the exams since then.
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