question on 08 practice exam

[itsyourz]

Hi David!
i'm frustrated after i scored my practice exam..
i have to push myself for 10 days!

anyway,
i got a question, page 71, No.29

answer says the yield of the bond is calculated by 1/maturity * ln(D/F)

D must be face value or future value and what is F? is it present value?? which is 150 in this problem

and where does this formula come from? because i've never seen it before

probably that is, exp(yield*maturity) = 300/ 150 ??

does it make sense? then why is it merton model?

thanks

suk

 

[David Harper CFA FRM]

Hi suk,

Please see this sheet on member page (the 2nd tab holds this exact question)
F = price (PV) of debt, in Stulz's terminology.

You say: exp(yield*maturity) = 300/ 150
Yes, exactly! 150*EXP(y*maturity) = 300...it is a simple pricing idea in disguise

The use of "Merton" here is confusing nonsense, that will only lead you to overthink this problem...ugggh what is the matter with these practice questions...

David