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first, i wanted to tell u i got a 70 in my F9 .. all thanks to you!!!!!
now, another dumb question from me:
ok….so given is that a 5 year redeemable bond needs to be issued at 4% coupon and redemption at par ($100).
we need to calculate the issue price and the YTM
so, the math for the issue price and the YTM is not the issue. the annual spot yield curve are also given in the question.
however, when choosing the 2 interest rates for the IRR style calculation to compute YTM, the text says:
“since the current price is below par, the YTM is more than 4%. therefore we will try 5% and 8%”
(the issue price calculated is 94.01)
can you pls explain this sentence …. because it goes at the heart of the understanding of such questions and i still dont get it!
i randomly chose 3% and 5% and my answer was obviously different. i think the selection of the discount rates reflects understanding of what is going on (which i am still struggling at)
thanks in advance
Congratulations on F9 – that is great 🙂
With regard to why they say that the YTM is more than 4%, the reason is that the interest yield (the effective interest each year) is coupon rate (in this case 4), divided by the current market value.
The only reason that the YTM will be different from this is because (in this case) the redemption is more than the current market value (so a ‘gain’ on redemption). Had the redemption been at less than the current market value, then the YTM would be lower than the interest yield, and had the redemption been the same amount as the current market value, then the YTM would equal the interest yield.
So that gives a starting point for sensible guesses for the IRR calculation, but even then if you choose different guesses (so for example 5% and 9%) you will get a slightly different IRR because the relationship is not linear. This does not lose you any marks in the exam.
thank u! .. one quick unrelated question:
animal 1: free cash flow
animal 2: free cash flow to firm
animal 3: free cash flow to equityare animals 1 and 2 the same?
i dont see a FCF lecture by you..:(
Yes – 1 and 2 are the same.
And no – although there is a chapter in the lecture notes, there is no lecture. The reason is that the techniques involved are all covered in previous lectures.
The main problem with business valuations is one of approach which is why I have recorded several lectures working through the Question 1 of a few recent exams. In the lectures I discuss the approach as well as working through the technical content.
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