Elementary compound interest

[Theo34]

I would appreciate it, If someone can clarify the calculations on Elementary compound interest example 12.1
it reads:
A tax-exempt investor purchases 10,000 nominal of a newly issued 5 year fixed interest bond which is redeemable at par and pays coupons of 8% pa half yearly in arrears. calculate the price the investor should pay to obtain a yield of 10%pa.

calculations as below

p = 800 x [(1-v^5)/i] + 10000v^5 at 10%
= 800 x 3.883299 + 10000 x 1.1^-5
The 3.883299 in the expression above I do not get when i perform this calculation. I achieve something like 3.99 instead. can some help explain how to achieve this number please

 

[Aditya mohan mathur]

If you divide by i^(2) instead of i, you'll get the figure.
This is because the coupons are paid half yearly.

 

[Theo34]

Thanks. are you using i=0-08 0r i = 1.1? in any case are you able to run me through the calculations. i just tried your suggestion with i = 0,08 and 0,1. i still don't get the textbook answer

regards

 

[Aditya mohan mathur]

We'll discount using 10%.
Since the coupons are paid at 8%, we get the coupon amount as 8% of 10,000 as 800.

From the table book, at 10% compound interest,
(1-0.62090)/0.097618 gives 3.8833002 which is pretty close to the textbook figure.
0.097618 is i^(2) value.

 

[Theo34]

Thanks for the help...Now I know why I was getting an answer different to the textbook. I need to use the table book

 

[Theo34]

I have another question on the tables book: Lets say at 10%, i has a value of .1000; i^2 has a value of 0.097618 etc. Now the table continues to the right with information on n, (n+10)^n etc. How can I read the (1 + i )^n value of say i^2 when n=5?

I am guest the information set out on the page is two distinct sets of data; i.e the constants data is separate to the bit with headings n, (1+i)^n etc. data. Please clarify

 

[Theo34]

Here is another question:
A loan of £1000 bears interest at 6% pa payable yearly and will be redeemed at par after then years. An investor liable for income tax (40%) and capital gains tax (30%) buys the loan at £800. what is the net effective annual yield?

The solution reads: the net income of £36 is 4.5% of £800. where did the 4.5% come from?