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Hello Sir
I don’t understand the method which has been used to determine the govt. yield rates. Is there a simpler method to calculate these? ( ie. for bonds 1-3)
I am afraid that the is no simpler method 🙁
The market value of each bond is equal to the PV of the future receipts, each discounted at the government yield rate for each year separately.
So for bond 1, the MV is given as 104 and there is a receipt (interest and redemption) of 109 in 1 years time.
Therefore if the 1 year yield rate is R, then 109/ (1+R) = 104. Solving this gives R = 4.81%.For bond 2, the MV is 102, and the receipts are interest of 7 in 1 years time and interest+ redemption of 107 in 2 years time. We have calculated that the 1 year govt yield rate is 4.81%.
Therefore if the 2 year yield rate is R, then 102 = 7/1,0481 + 107/(1+R).
Solving this gives R (the 2 year yield rate) = 5.95%Similarly for bond 3.
This question was based on a technical article on the ACCA website:
https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/bond-valuation-yields.htmlExample 4 of the article took a while for me to understand the logic behind it.
I have got it now.
Thankyou Sir (:
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