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Hi John 🙂 , I have seen some questions of Macaulay duration use yield to maturity. Some questions use government yield+spread. So, does it mean I can use both?
The government yield + spread is what will determine the yield to maturity.
There is a good technical article on this on the ACCA website.
I’ve read the article and from my understanding:
1)We should use yield curve+spread to calculate market value for new bond
2)Then, after we know the market value, we can calculate YTM using IRR method
3)YTM is the average required rate of return while yield curve is specific for yearFor example, if the question ask for the market value of the bond but no information given on yield curve + spread. If the information clearly states the YTM%, then can I use the YTM instead?
In addition, YTM is the cost of debt after we incorporate tax in the calculation?
Yes – that is all correct except for the last line. The yield is the return to the investor for which company tax is irrelevant (tax is only relevant when looking at the cost of debt).
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