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Hi please can you help – I don’t understand how they have got the answer 3.57 as the coupon rate required for the new bond? I can see the answer in the ACCA answer booklet but it doesn’t make any sense to me. Also why are all the yield rates calculated to the minus power of the rate eg 1.0251(power of -2). Thank you
As always the market value of the bond is the PV of the future receipts (interest and redemption) discounted at the required return.
The market value is $100, the redemption is at par. So we let the interest be R and then discount each interest receipt and the redemption at the relevant spot rate.
So for the year 1 interest, the PV is R x 1/1.022.
We do that for all of them and then solve the equation for R.Writing 1.0251 the the power -2 is simply a standard way of writing 1 / 1.0251 to the power 2.
(Something to a negative power is the same as 1 / the same number to the positive power. It doesn’t matter how you write it in the exam).
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