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hi sir….
i am having difficulties in understanding the solution to this question
Example
A government has three bonds in issue that all have a face or par value of $100 and are redeemable in one year, two years and three years respectively. Since the bonds are all government bonds, let’s assume that they are of the same risk class. Let’s also assume that coupons are payable on an annual basis.
Bond A, which is redeemable in a year’s time, has a coupon rate of 7% and is trading at $103.
solution
Bond A: $103 = $107 x (1+r1)-1
r1 = 107/103 – 1 = 0.0388 or 3.88%in the solution it did not take into account the power of negative 1.
why was it omitted when arriving in the answersir can you kindly help me understand how the formulae can be solved taking into consideration the power of negative 1 when solving the formulae
thank you so much in advance
The solution has taken account of the negative power.
(1+r1)^(-1) means 1/(1+r)
Now it should work for you.
thanks sir..
but the number of years is not supposed to be taken into consideration
like 1/ ( 1 + r ) ^n
All you asked about in your first question was the use of a negative power.
Yes – all three years should be taken into account, but without knowing which question you are asking about then I cannot say more.
Please tell me which question you are referring to.
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Hi John
Is there a lecture on estimating the yield curve?
Thank you
No, because there is no standard technique. It is specific to the specific question. I assume you have read the ACCA’s technical article on this?
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Hi John
I have read the article however I don’t understand example 4, how they estimated the annual spot yield curve. Bond B, I don’t know where they got the 5.78 and Bond C 4.81 and 4.54.
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