# Investment Planning - Government Bond

Discussion in 'Financial Planning Study Group' started by SteelMonkey, 25th Feb, 2010.

1. ### SteelMonkeyMember

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Hi All

Having some trouble with question 3 and it seems a bit different to some of the other question 3's that ive been reading which seem to have a couple of different answers provided.

the crux of the question is:
Calculate the purchase price of a 10 year government bond parcel with two full years remaining in its term. The bonds yeild rate is 8.95%pa, paid as a half yearly coupon and assume the prevailing market interest rate is 7.5%pa. Use a parcel price of \$100.

I am just looking to see if anyone can give me any idea of the formula i should be using. In the study notes the formula to use is:
P=V/(1+i)^n

where P = Present Value
C = Future Value
n = Number of coupon periods
i = market yeild divided by 200

Or is this the incorrect formula and ive totally missed the point

If someone could help me out I would be very appreciative!

2. ### CJ. WentworthWell-Known Member

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hey SM, just sent a message over MSN to ya.

To other's looking, in the IP October 2008 Study Notes, the calculation you need is outlined on page 6:11 under Pricing Security Coupons with further information on page 6:14 Parcel Pricing of Coupon Securities

3. ### SteelMonkeyMember

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Brilliant, thanks for that CJ!

4. ### Scotty1975Member

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IP1 Question 3

Hi SteelMonkey,

I have exactly the same question in my IP1 assignment as you.

How are you going with it?

I've had a crack at it and got \$102.64 for my answer.

Although Im not 100% confident I have the right answer, I believe Im on the right track considering the yield price is greater than the market price.

What did you get?

Regards

Scott

5. ### LourdesMember

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Perth, WA
Hi

I'm also doing IP1 with Kaplan at the moment.

I actually got an answer of \$99.37??

6. ### SteelMonkeyMember

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Hi Lourdes

Which formula did you use ?

Did you use the PV = FV + C / 1 + I ?

I actually got 101.35 but again am not very confident with that answer!

We are going good so far, we have three different answers

7. ### LourdesMember

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Hi SteelMonkey

Now I'm getting more confused, I'm not so sure about my answer either.

I use the formula on page 6:14 as suggested by CJ Wentworth.

PV = FV + C / [1 + (DM / D) ]

Anyone who can confirm which one is right? Thanks

8. ### SteelMonkeyMember

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This is all very confusing

Page 1:14 in my notes refers to the Pricing Discount Securities with the formula being:
(PV) = (D*FV) / D + (Y * DM)

Page 6:10 in my notes refers to Pricing Coupon Securities, which I thought would be the relevant section for a commonwealth bond ?

There are a few different versions of the notes and questions going around which just adds to the confusion!

9. ### Scotty1975Member

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Government Bond Query

I think that the initial problem that we are facing (and this in turn is causing us some grief in which formula to use) is whether we use a coupon security formula or a discount security formula.

IMO, I believe we have to use a coupon security formula, as discount securities have no coupon payments during the term. Refer text notes.

The problem is....Im not confident on which formula to use.

The text does state however, that the market price of a coupon security will be greater than the face value if the coupon rate is greater than the prevailing market rate.

Therefore, based on this analogy, the answer must be greater than \$100.

Im still not confident my answer of \$102.64 is correct, but I think Im on the right track in regards to my thinking.

10. ### SteelMonkeyMember

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I agree with you scotty

Which formula did you use to come up with your answer ?

11. ### CJ. WentworthWell-Known Member

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Lourde's, my apologies if I confused you.

The calculation you should use is on page 6:11 outlined by steelm. The further information that you need on 6:14 is that bonds are 'generally' priced in \$100 units. This gives you a value for FV instead of some arbitrary number.

12. ### CJ. WentworthWell-Known Member

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also guys, it may be an idea to verify that you're using the same study notes. One may be more updated than the others.

In my example the bond only had 265 days until maturity. Scotty's looks like it has 2 years.

13. ### LourdesMember

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Hi CJ

As always, your input is much appreciated.

My bond parcel actually has 250 days till maturity. So I was wondering, because it's not a full year till maturity, should I be using a different formula (the one I mentioned before that takes into account DM / D)?

Because it only has 250 days till maturity, the market price will be lower than the face value if sold, does that make sense or I'm completely on the wrong foot here?

Lourdes

14. ### netcentre4Member

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VIC
Hi,

I just performed the calculation to the bond question and i got \$102.64 as well. However, I was told by Kaplan marker that I need the answer to be 3 decimal places and figure might be wrong. Can someone please help.

Thanks
netcentre4

Because the bond has exactly two years to maturity, then the interest rate (7.50%) that would apply is 3.75%.

PP = 4.475 + 4.475 + 4.475 + 4.475 + FV (\$100)
1.0375 (1.0375)2 (1.0375)3 (1.0375)4

= 4.313 + 4.157 + 4.007 + 90.169

= \$102.64

15. ### lost1New Member

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Hello all, I'm now totally confused as to which formula to use for Q3.
Any one prepared to clarify?

16. ### AllyMember

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sydney, nsw
I used the same formula as netcentre and to 3 decimal points i got \$102.647. I only rounded it to 3 decimal points on the final answer.

Took me a while to work it out though. It's pretty confusing

17. ### lost1New Member

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Thanks............ I got \$105.17 hope one of us is right

18. ### lost1New Member

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Forget that. I'm doing a different assignment!!

19. ### chels84Member

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Newcastle, NSW
Hi Guys,

I for the 2 yrs to maturity assignment version I got \$102.63. The formula I used is:
PV = C1 + C2 + C3 + C4 + FV
1 + I (1+I)2 (1+I)3 (1+I)4

I have handed my assignment in and got it back as being compentent, so it must be right.

Hope this helps.

20. ### lost1New Member

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