why are they putting 1,000 in for the PV to calculate BEY instead of the PV that was calculated of 961.39?
what am i missing - every example i see in the book uses the PV that is calculated in step 1 which is 961.39
bump bump bump
I dont have the question in front of me, but when I get home I will post
Ok here it is:
Step 1) Find the value of the bond at the horizon. The horizon in this case is 2 years, or 4 periods, given in the exam.
FV = -1000
PMT = 9%/2 = 4.5% = -45
IY = 10% (given in the exam as the analysts prediction). So 10/2 = 5
N = 10 (7 year bond so 14 periods. 2 years from now is 4 periods, so N=10 for discounting)
Solve PV = 961.39
Step 2)
We are told coupons can be reinvested at 8%, so we solve for the value of the coupons at horzion time:
45 + 45*(1.04) + 45*(1.04)^2 + 45*(1.04)^3 = 191.08
We then add that the the PV we found in step one, = 1152.47. This now becomes our future value.
Now, we solve for IY using the folowing info:
PV = 1000 (bond is trading at par, given)
FV = -1152.47
PMT = 0. Remember coupons could be reinvested at an assumed different rate, and we have already accounted for that so we do not want to double count
N = 4
Solve for IY = 3.61. Multiply by 2 = 7.22 = BEY
If we wanted the EAY = 1.0361^2 - 1 = 7.35%
Hope this helps