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Value of bond using YTM

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Value of bond using YTM

  • This topic has 4 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
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  • May 26, 2016 at 6:37 pm #317299
    Anonymous
    Inactive
    • Topics: 43
    • Replies: 65
    • ☆☆

    Hi John,

    Just want to clarify, when we value a bond and the question gives use the government risk free rate and the company specific risk premium we will use that to combination determine the value.

    However if we are given the risk premium in a table which states the premium for each year say 5 years for a AA rated company and the bond we are valuing is a 5 year bond, do we determine the YTM by simply adding the 5th year risk premium to the risk free rate or rather at each years risk premium to the the risk free rate and discount each of the 5 years by a different YTM rate? so for example the risk free rate is 5% and year 1 risk premium is 0.5 and year 2 is 0.6 we will discount year 1 at 5.5 and discount year 2 at 5.6 and so on..

    May 30, 2016 at 8:24 pm #318200
    Anonymous
    Inactive
    • Topics: 43
    • Replies: 65
    • ☆☆

    Hi John Could you please clarify if the above is correct?

    Thank you

    May 31, 2016 at 7:05 am #318269
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    It slightly depends on the wording, but usually you would discount each year separately (as in your last sentence).

    (Sorry for not answering sooner – I must have missed your original question 🙁 )

    May 31, 2016 at 3:01 pm #318433
    Anonymous
    Inactive
    • Topics: 43
    • Replies: 65
    • ☆☆

    Thanks so much John, and not a problem at all I know you have many questions flying at you.

    Thanks for taking the time to answer mine.

    May 31, 2016 at 3:16 pm #318440
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    You are very welcome 🙂

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