PQ-external Kaplan Schweser Practice Exam 2014 Part I Question 43

[RaDi7]

Hi David,

could you please check whether one can solve the question 43 using the PV-function in the calculator? Here is the question:

I get an answer 1,011.74 when I use my calculator. Do I made a mistake? I calculate so: N=3; I/Y=2.2/2=1.1; PMT=15; FV=1,000 -> CPT PV = 1,011.74. Here is the right answer:

Is the way I'm solving it wrong??

Thank you very much and best regards!

 

[David Harper CFA FRM]

@RaDi7 is this GARP or another provider? (you have it as GARP but it doesn't look like it..). I will check it, but I just want to move it to the proper location assuming its not GARP (cc @Nicole Seaman )

 

[RaDi7]

@RaDi7 is this GARP or another provider? (you have it as GARP but it doesn't look like it..). I will check it, but I just want to move it to the proper location assuming its not GARP (cc @Nicole Seaman )

Hi David,

sorry, you are right. The exam is not from GARP but from Kaplan Schweser. I haven't paid attention to this. Sorry.

Best regards!

 

[rajivpro]

Hi @RaDi7,

Just to answer your query, the CFs' will be discounted at the respective forward rates. So the 6 month discounting factor will be 1/(1+(.015/2)) = 0.992556, the discounting factor for year 1 CF will be 0.992556*(1/(1+0.0210/2)) = 0.98224.

I am not sure of a method where you can use the TVM function of the calculator for different discount rates for multiple periods.

Thanks,
Rajiv

 

[David Harper CFA FRM]

Hi @RaDi7 The flaw in your approach is that you are assuming the bond's yield (ie, yield to maturity) is 2.20%, but that is the 1.5 year spot rate. If the spot rate curve were flat at 2.20%, you can assume yield equals 2.20%; but if the spot rate curve is upward sloping, then yield will be (slightly) less than the 2.20%. The given answer looks correct to me. I hope that helps. Thanks,

 

[kansal7mba]

The simplest formula to find the FORWARD rate is (R2T2 - R1T1) / T2 - T1.
But the calculation is more accurate using say (1+x)^3 / (1+y)^2 - 1.