Investment Planning - Government Bond

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!

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

Brilliant, thanks for that CJ!

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

Hi

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

I actually got an answer of $99.37??

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

How did you go about getting your answer ?

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

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!

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.

I agree with you scotty

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