# IP1 - Grace Version

Discussion in 'Financial Planning' started by SaraElise, 6th Jul, 2011.

1. ### SaraEliseMember

Joined:
6th Jul, 2011
Posts:
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Location:
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

2. ### beejay89Member

Joined:
5th Jul, 2011
Posts:
5
Location:
Yeppoon, QLD
- 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??

3. ### SaraEliseMember

Joined:
6th Jul, 2011
Posts:
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Location:
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

4. ### beejay89Member

Joined:
5th Jul, 2011
Posts:
5
Location:
Yeppoon, QLD
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