Hi Everyone, I am currently trying to finish the IP1 assignment. I am really stuck on question 2B: "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: three full years remaining until maturity the bond’s coupon rate is 6.95% per annum, paid half-yearly prevailing market interest rate is 7.20% per annum parcel price of $100." I am not a mathemtical person at all and really need help with the equation and how to illustrate how prices change. I am very good at how to answer questions and the text detail if someone needs help on that but I really need help with the above calculation. Thank you

- Long-term interest rate securities can provide a known yield to maturity however, if the interest rate moves, then that means that the resale market value of these securities could change. - Eg: if interest rates move up – (on the secondary market) the capital price of the bond will fall and will allow the bond to be bought for less than its face value. - If interest rates fall – capital price of the bond will rise and it will be bought at a premium (more than its face value). The total value of the bond will equal the Face Value plus the present Value. We already know the face value is $100.00 so to find the present value, we calculate the present value at each coupon payment, and add all of these to the face value at the last coupon payment. P = C / (1+i)n Where: P = Present Value (Price) C= Coupon Value (interest payments) N = Number of Coupons I = prevailing market interest rate divided 200 Therefore: P = What we need to find C = $3.475 (as the coupon rate = 6.75% of $100 per year ($6.75) paid every half year (so $6.75/2 = $3.475) N= 6 (as there are 3 years until maturity and it is paid every half year. So 2 payments for 3 years = 6) i = 0.036 (7.2%/2) Hence: P = (3.475/(1+0.036)1) + (3.475/(1+0.036)2) + (3.475/(1+0.036)3) + (3.475/(1+0.036)4) + (3.475/(1+0.036)5) + ((3.475+/(1+0.036)6)+100) = 3.475/1.036 + 3.475/1.073 + 3.475/1.111 + 3.475/1.151 + 3.475/1.193 + ((3.475/1.1236) + 100) = 3.354 + 3.238 + 3.127 + 3.019 + 2.912 + 83.717 = $99.367 Does this help??

Thank you! Hi beejay89 Thank you so so much for your help on this! I really apprecitate it. I feel alot better about tackling this question now

You're very welcome : )... I've received alot of help with my DFP and i'm just paying it forward... Hope u do well!! Belinda