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yield and bond valuation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › yield and bond valuation

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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    Posts
  • July 2, 2019 at 2:11 am #521633
    toushiga
    Participant
    • Topics: 424
    • Replies: 172
    • ☆☆☆☆

    Hello Sir,
    for this acca technical article,
    https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/bond-valuation-yields.html

    Example 3, Valuing bonds based on the yield curve

    Why the company valuing the bond price is based on the spot rate for each individual int and principal payment like zero-coupon bond rather than using the YTM to calculate the price? What is the logic behind and can you please explain it for me? Thank you.

    July 2, 2019 at 6:45 am #521637
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    The idea is basically the same as always.

    The market value is the PV of the future receipts, discounted at the investors required rate return.

    Usually we just use one required rate of return (the YTM) to discount all the receipts. However, since the receipts are each received in a different number of years (i.e. a receipt of interest after 1 year, another receipt after 2 year, etc.) it is more sensible to discount each receipt at the rate of return applicable for that time period. So for a receipt in 1 year, discount at the rate of return for 1 year (from the yield curve), for a receipt in 2 years discount at the rate of return for 2 years (from the yield curve) and so on.

    Because the return required changes depending on the time until the receipt (i.e. the yield curve) it make more sense to discount each receipt and the relevant rate rather than just applying one ‘overall’ rate.

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