Can someone please explain the question and answer. Thanks!
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Hey Krishna,
If i am not wrong this was Nov 19 RTP Question.
Spread of any sort is basically difference between two given comparable items. So in this question, spread of yields is asked. You just need to find the Yield of the bond for which you are given information and then compare it with the comparable bond’s yield (11.8%) and spread will be the difference between the two.
Usually yield’s shortcut formula is YTM = {Coupon Amount + [(Face Value – Price)/Duration]} / (Face value + Price)/2.
But as in the question they have given present value factors, they expect you to solve using it.
Pretty simple. Price = Coupon amount (PVIAF (YTM,Years)) + Redemption amount (PVIF(YTM, years))
Replace two possible rates given that is 11% and 13% for YTM. By solving you will get YTM and then take difference with 11.8% comparable bond for arriving at spread.
Possible confusion for you can be Rs 91 given in the solution. That is NPV while solving through 11% YTM. (NPV = PV of the bond’s price – Price given). This is derived for putting it in formula of IRR which is
Lower Rate + Rate diff ( ie 13-11) [Lower rate’s NPV / (Lower rate’s NPV – Higher rate’s NPV)]
Hopefully your doubt is clear. All the best! :))
Thanks a lot Mukti!