Schweser book 4 page 165,
How was the PV of risky bonds calculated?
For example, for time 1.5, i use 30e to the power of (-1.5*0.0029)=29.87 but the answer is 29.78. Why???
no one knows?
The formula is PV=cash flow*e^(-rt)
If risk free rate=0.16%, credit spread=0.07%, then the total yield for risky bond is 0.23%.
Assume time=1 and cf=30, PV for risk free bond will be 30*e^(-0.0016*1)=29.95, which is the correct answer.
However, PV for risky bond will be 30e^(-1*0.0023)=29.93. Schweser has 29.88!
For that example, I cannot come to the PV for all the risky bonds!
Anyone has the same problem or is it me who missed something somewhere?
The book is wrong, your calculation is correct. They`ve published an erratum in their online material:
http://online.schweser.com/online_program/notes_updates.php?show_book=4
Page: 165 - SchweserNotes Book 4, Pg.165, “PV(Risky)” column The correct values in the “PV(Risky)” column should be as follows: 0.5: 29.98, 1.00: 29.93, 1.50: 29.87, 2.00: 29.81, 2.50: 29.73, 3.00: 1017.41, Total: 1,116.73 (SchweserNotes Book 4, page 165, “Present value of expected loss” example) ( Posted: 2013-09-15)
Thanks a lot!!
Appreciated! Was just reviewing this section and could not figure out what I was doing wrong in the Blue Box!