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Mar/Jun 17 – Valuation and yield to maturity of bond

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Mar/Jun 17 – Valuation and yield to maturity of bond

  • This topic has 5 replies, 2 voices, and was last updated 5 months ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • April 13, 2023 at 4:58 pm #682605
    phuongmore
    Participant
    • Topics: 103
    • Replies: 106
    • ☆☆☆

    In Toltuck question, the answer is :

    The goverment yield curve can be estimated from the data available:
    Bond 1 : $104 = $109/ (1+r1) => r1 = 4.81%
    Bond 2: $102 = $7/1.0481 + $107/(1+r2)^2 => r2 = 5.95%
    Bond 3: $ $98 = $6/1.0481 + 6/ 1.0595^2 + $106/(1+r3)^3

    Please explain what is the meaning of :
    $7/1.0481 of bond 2
    $6/1.0481 + 6/ 1.0595^2 of bond 3

    Thank you.

    April 14, 2023 at 9:02 am #682626
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    The MV is as always the PV of the future receipts discounted at the relevant returns.

    4.81% is the 1 year return, so for bond 2 the MV is equally to the interest in 1 year of 7 discounted at 4.81% plus the receipt of 107 in 2 years discounted at the 2 year return. So using simple algebra we can calculate the 2 year return,

    It is the same logic for bond 3.

    April 14, 2023 at 2:47 pm #682640
    phuongmore
    Participant
    • Topics: 103
    • Replies: 106
    • ☆☆☆

    There are 3 separate bonds in issue.Why interest in 1 year of 7 discount for bond 2 is discounted by 1 year return of bond 1 ?Do you have any lecture on this topic?

    April 14, 2023 at 4:25 pm #682646
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    Because the bonds are all the same risk and therefore the rate for time 1 is applies to the time 1 receipt for all of the bonds.

    There is no specific lecture on using the different rates for each year, but the method of valuing bonds is obviously covered in the lectures and there is a Technical Article on the ACCA website covering what is examined in this question.

    April 14, 2023 at 4:48 pm #682648
    phuongmore
    Participant
    • Topics: 103
    • Replies: 106
    • ☆☆☆

    Which chapter contains your lecture for content of method of valuing bonds?

    April 15, 2023 at 10:58 am #682657
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    Chapter 11 (although the lectures are meant to be watched in order as a complete course – not watched piecemeal).

    The basic valuation of debt is revision also from Paper FM.

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Mar/Jun 17 – Valuation and yield to maturity of bond’ is closed to new replies.

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