# Invetment Planning 1 AS3001 Q2b HELP

Discussion in 'Financial Planning Study Group' started by mee, 25th Feb, 2011.

1. ### meeNew Member

Joined:
25th Feb, 2011
Posts:
3
Location:
Brisbane
Hi everybody,

I have recently submitted my IP1 (version SN3001 / 2010) and has been advised by the checker I have used the incorrect formula. Hence my formula is wrong.

This is my calculation. Can someone advise?

Q) How prices of fixed interest investments can change, illustrating the main concepts by calculating the purchase price of a 10-year government bond parcel with the following features:

Ø three full years remaining until maturity
Ø the bond’s coupon rate is 6.95% per annum, paid half-yearly
Ø prevailing market interest rate is 7.20% per annum
Ø parcel price of \$100.

Assuming you want to purchase a 10 year government bond of \$100 parcel price (FV) with the following terms:

Time to maturity: 3 full years or 1,095days

Bond yield rate of 6.95% p.a. paid as a half-yearly coupon (C)

Prevailing interest rate is 7.20% p.a. (I)

The formula is PV (present value) = FV + C
1 + I

PV = 100 + 6.95
1 + [0.072 x (1,095/365)]

= 106.95
1.216

= \$87.95 (purchase price of the bond parcel)

Many thanks.

I am happy to assist anyone else with some of the other questions.

2. ### builder2818Well-Known Member

Joined:
31st Dec, 2008
Posts:
89
Location:
Sydney
You need to use the formula on page 4:34. The value of your coupon payments (C) is 3.475 and the interest rate you need to use for i is 0.036 (3.6%).

How to calculate these numbers is shown on the bottom of page 4:31 and page 4:33

I got 99.337 for my answer.

3. ### niccers77Member

Joined:
9th Nov, 2010
Posts:
5
Location:
Tarrenlea, Vic
Thanks builder 2818 - I have been struggling with this one for a few days and couldn't get an answer I thought feasable. I have it now thanks to you.

4. ### Kate2011Member

Joined:
17th Apr, 2011
Posts:
8
Location:
NSW

Hi there,

I'm just having a look at this question and was wondering if you could show your workings for this question as I'm using the same formula but coming to a slightly different answer.

5. ### builder2818Well-Known Member

Joined:
31st Dec, 2008
Posts:
89
Location:
Sydney
PV = C1/(1+i) +...........C6+FV/(1+i)6

3.475/(1.036) +...............103.475/(1.036)6

3.354 + 3.238 + 3.125 + 3.017 + 2.912 + 83.691

= 99.337