June 2016 Sect B question 3 –

Hi John,

Trust you are well.

I wanted just a small clarification for the answers regarding the June 2016 exams section B question No 3

i have been able to find the all the answers except for the 2nd paragraph below.

“If share prices increase by 4% per year, the share price in seven years’ time will be $8·55 per share ($6·50 x 1·047) and the conversion value will be $940 per loan note ($8·55 x 110).
This conversion value is less than the nominal value of $1,000 per loan note and less than the expected market value of $990·82 per loan note at the end of seven years (0·926 x $1,070). On financial grounds, holders of the loan notes are likely to hold them until redemption after eight years.”

I thought the expected market value should have been the following after 7 years :

1-7yrs Interest 70 * 5.206 (df@ 8% as per the question) = 364.4
7 Redemption 1000* 0.583 = 583

Total of $ 947.4

But why did the examiner used (1070 * 0.926 ) for expected market values after 7 years ??

Thank you