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 This topic has 3 replies, 2 voices, and was last updated 2 months ago by John Moffat.

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June 8, 2022 at 7:36 am #657853tinkle
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Hello, Sir, I really don’t understand regarding YTM calculation that when is it when we calculae rates like (1.043^2/1.04)1 for all years and then discount for MV calculations??
please is there anyway I can get my concept regarding this cleared…
I don’t understand why did we straight away add credit spread to annual spot rates I’m so super confused in this concept please recommend me how to get this cleared.June 8, 2022 at 9:15 am #657883John MoffatKeymaster Topics: 57
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The government yields are those given by the government. Investing in individual companies is more risky than investing in the government and therefore the interest they need to pay will always be higher than government rate depending on their credit rating. The credit spreads are the extra that has to be paid and are therefore always added. Here they are being added so as to determine that interest that Kingtim will end up having to pay.
The value of the new bonds is therefore the PV of the coupon interest rate discounted at the relevant rates for each of the years.
As far as the workings you quote in your second line is concerned, for 1 year the rate is 4% in this question and is 4.3% per year if it is 2 years. The 4.3% per year is the average per year, and so if we wanted a rate for the second year on its own (which is not needed for this question) then we would then need to use the workings that you have written. After 2 years at an average of 4.3% per year, we would be multiplying by 1.043^2. This is equivalent to multiplying by 1.04 for 1 year and then by 1.046 for the second year. (1.046 = 1.043^2 / 1.04).
You might find the following article on the ACCA website to be helpful:
https://www.accaglobal.com/gb/en/student/examsupportresources/professionalexamsstudyresources/p4/technicalarticles/bondvaluationyields.htmlJune 8, 2022 at 9:36 am #657891tinkle Topics: 50
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Hello Sir, I have read this article and this is why I’m confused that why don’t we find year 2 an dyear 3 and 4 rates and then add the credit spread,
How do I understand that when is it that we need to find the equivalent per year rates…
June 8, 2022 at 2:56 pm #657938John MoffatKeymaster Topics: 57
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In Kingtim the question gives the spot yield rates as part of the question.
The time you would need to use that ‘formula’ approach as part of the workings is when you were not given the spot yield rates but were given the coupon rates and were asked to calculate the spot yield rates (as is the case in example 4 of the article).

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