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Sir in this solution b (i)
(i) Value of 5% coupon bond
$5 x 1·0385–1 + $5 x 1·0446–2 + $5 x 1·0507–3 + $5 x 1·0580–4 + $105 x 1·0612–5 = $95·72
Hence the bond will need to be issued at a discount if only a 5% coupon is offered.can you please explain me the last line that the bond need to be issued at discount.
Thanks.
The bonds have a nominal value of $100, and you would usually expect them to be issued for $100. However, they can be issued at a discount.
Since the value here is $95.72 they will need to be issued at that price (nobody would be prepared to pay $100 for them if they are only really worth $95.72).
please refer to Dec 2011 Question 3 “LEVANTE Co”
https://www.accaglobal.com/content/dam/acca/global/pdf/p4_2011_dec_q.pdf
We are required to calculate the Market Value of the bond (which will be the value at which it will be issued to investors)
The bond is a 5% coupon, par value $100, 5 yr, Rating A
We are given a credit spreads table. Its simply a matter of choosing the right credit spread and discounting the bonds cash flows to arrive at market value.
PROBLEM
instead of choosing the 5 yr credit spread for A rating for all the years (112 bp + 5% = 6.12%) the answer uses a SEPERATE discount rate for each years cash flow.
yr1 . 3·85% .$5
yr2 . 4·46% .$5
yr3 . 5·07% . $5
yr4 . 5·80% . $5
yr5 . 6·12% . $105https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p4_2011_dec_a.pdf
Now refer to question “Do It Yourself”. In this question they use a SINGLE discount rate chosen from the credit spread table for each years payment. I have seen in other questions as well that the SINGLE discount rate is used for all years. So if a bond is a 10 yr bond, the 10 yr yield spread is used for all the years.
kindly tell why two different methods are chosen ???
I understand what seems a conflict.
However in Levante the question is asking to estimate the market value given they are issuing at a fixed coupon rate, whereas Do it Yourself is after the cost of the debt.
Levante was set by the current examiner (the other questions were set by previous examiners) and he had written an article before setting the question explaining the approach that he wanted. If he asks something similar again, then this is what he will want.
Here is the article:
https://www.accaglobal.com/ubcs/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/bond-valuation-yields.html
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