Par bond yield

C

casius

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Just a quick question. I have a mental block.
What at are the keys I must press to solve for PMT:
n=3
Spot price in period s1 = 1%
Spot price in period s2 =2%
Spot price in period s3= 3%
fv=100
pv=100
i tried the following on the calculator set N=1, I/y =1, fv=100, pv =-100. Etc and calculate for pmt. I repeat moving the I/Y up a point along with N. I end basically with 1, 2 and 3 for each pmt respective of period.
I can’t see how the figure of 2.96 is done.
 
100 = C/1.01 + C/(1.02^2) + (100 + C)/(1.03^3)
A little algebra should get you to C = 2.96. While your calculator is useful for many situations, it can’t handle the situation where the interest rate changes year by year.
 
You cannot use the cash flow buttons on your calculator to solve this problem. It requires some algebra:
100 = PMT / 1.01 + PMT / 1.02² + PMT / 1.03³ + 100 / 1.03³
100 = 0.9901PMT + 0.9612PMT + 0.9151PMT + 91.51
8.49 = 2.8664PMT
PMT = 8.49 / 2.8664 = 2.96.
Of course, on the exam you wouldn’t waste your time doing this. You would try the middle answer choice (B); if it gives you a PV of 100, then B’s your answer. If it gives you a PV greater than 100, then B is too high; A’s your answer. If it gives you a PV less than 100, then B is too low: C’s your answer.
 
FYI guys the approach S2000 just showed you will save your ass. Many times! Several times on the exam I would not have been able to solve a problem but luckily they give you answers and you can back into an answer.
They key is to do plenty of mocks so you can recognize those problems quickly and not waste time with trying different mathmatical approaches if you dont know how to compute it!
 
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