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sir, here I used the IRR function to calculate the govt spot yield curve and got this result
bond 1 -104 109 4.81%
bond 2 -102 7 107 5.91%
bond 3 -98 6 6 106 6.76%while the method given in the kit is
Bond 1: $104 = $109/(1 + r1)
r1 = ($109/$104) – 1 = 4.81%
Bond 2: $102 = $7/1.0481 + $107/(1 + r2)2
r2 = [107/(102 – 6.68)]1/2 – 1 = 5.95%
Bond 3: $98 = $6/1.0481 + $6/1.05952 + $106/(1 + r3)3
r3 = [106/(98 – 5.72 – 5.35)]1/3 – 1 = 6.83%is my method wrong here?
Your method is wrong (although you would still get some marks).
The reason is that the 4.82, 5.91 etc. are the ‘overall’ returns per year from each of the bonds, so for the yield curve we need to calculate the return in each year individually that results in those overall returns.
This was a very unusual question although it was covered in one of the technical articles on the ACCA website (before it was asked in the exam).
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