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Investment Planning - Government Bond

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

  1. SteelMonkey

    SteelMonkey Member

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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. Wentworth

    CJ. Wentworth Well-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. SteelMonkey

    SteelMonkey Member

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    Brilliant, thanks for that CJ!
     
  4. Scotty1975

    Scotty1975 Member

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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. Lourdes

    Lourdes Member

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    Hi

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

    I actually got an answer of $99.37??
     
  6. SteelMonkey

    SteelMonkey Member

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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 :rolleyes:

    How did you go about getting your answer ?
     
  7. Lourdes

    Lourdes Member

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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. SteelMonkey

    SteelMonkey Member

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    This is all very confusing :eek:

    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. Scotty1975

    Scotty1975 Member

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    Government Bond Query

    Hey Lads,

    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. SteelMonkey

    SteelMonkey Member

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    I agree with you scotty

    Which formula did you use to come up with your answer ?
     
  11. CJ. Wentworth

    CJ. Wentworth Well-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. Wentworth

    CJ. Wentworth Well-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. Lourdes

    Lourdes Member

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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. netcentre4

    netcentre4 Member

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    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. lost1

    lost1 New 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. Ally

    Ally Member

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    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. lost1

    lost1 New Member

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    Thanks............ I got $105.17 hope one of us is right
     
  18. lost1

    lost1 New Member

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    Forget that. I'm doing a different assignment!!
     
  19. chels84

    chels84 Member

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    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. lost1

    lost1 New Member

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    Thanks! Working on the case stugy now. All the best with your exam.