Can someone explain how the answer are calculated, both acted revision notes and the examiners report just go from formula to answer without showing the steps in between - for instance i can see the 2 year bond in calculated using a quadratic equation - however not only does this take time, it's also very difficult to do for 3 years and say 4 years - so i assume there is a much quicker way which i'm obviously missing.
Just to add if using Taylor's approx
5.4/(1.055) + 105.4/(1+x)^2 = 100, where x is zC2
5.4/(1.055) + 105.4/(1+2x) = 100
5.1184 +105.4/(1+2x) = 100
105.4/(1+2x) = 94.8815
105.4 = 94.8815 * (1+2x)
105.4 = 94.8815 +189.763x
10.5185 = 189.763x
x = 0.0554 ~ 5.55%
As you can see, that gives zC2 of 5.55%, whereas C2 is 5.4% - so this doesn't make sense - the answer should just be below 5.4% so i'm failing to see what is wrong?
Last edited: Sep 15, 2020
