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Dear John,
I’ve saw your explanation on this Valuation of Bond & Yield to Maturity (YTM) on your “Ask ACCA Forum”.
However, when I am trying to perform the calculation on Mar/Jun 2017, I’ve realised the Valuation of Bond for Year 3 (either old rating or new rating) is using of $110 instead of $102.
Based on the Qs, it mentioned “Issued 8% bond, nominal value $100, premium 2% on redemption at par”.
Would you mind to explain to me on this?
Thank you.
On a nominal value of $100, the interest will be $8 per year and the redemption is $102.
So the receipts to the investor will be $8 at time 1, $8 at time 2, and a total of $110 (8 + 102) at time 3.
Dear John,
Thank you for your prompt responses.
Can I assume that when we see this kind of Qs in the exam, for the valuation of bond, we need to add the interest which is $8 inside the redemption which is $102 in total $110? Whereas for Yield to Maturity, the redemption is just only $102.
Thank you.
You use the same figures for both.
I know the answer sets it out slightly differently for the two parts but they are the same flows.
One shows 8 per annum for years 1 to 3 and then 102 at time 3, the other shows 8 at each of times 1 and 2 and then 110 at time 3. The flows are exactly the same in total at time 3.
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