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It's about Future Bond Price. I think, similar to Future

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It's about Future Bond Price. I think, similar to Future [#permalink]

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New post 07 Jul 2006, 12:19
This topic is locked. If you want to discuss this question please re-post it in the respective forum.

It's about Future Bond Price. I think, similar to Future Stock Price, Future Bond Price are calculated by using risk-free rate. But my professor used the Bond Yield instead. I am pretty sure he's wrong, but need your comment to be certain.

Thanks mann
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Re: Any Finance Guy Here? I have a questions about Derivativ [#permalink]

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New post 07 Jul 2006, 18:58
siamman wrote:
It's about Future Bond Price. I think, similar to Future Stock Price, Future Bond Price are calculated by using risk-free rate. But my professor used the Bond Yield instead. I am pretty sure he's wrong, but need your comment to be certain.

Thanks mann


if you post the exact question, would be easy to answer in particular.

the general concept is that risk adj rate (YTM) is used to find the FV (or PV) of the bond as long as the bond is not a t-bill/risk free. Risk-free (RF) rate is used is used to value the risk-free bonds/securities.

if needed more, do sens me PM the specific question. i am not sure how reasonable is it to discuss problem not related the gmat on forum...
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 [#permalink]

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New post 07 Jul 2006, 22:52
If you post the actual question it would be helpful.

Pricing bonds properly usually involves "strips" where one would discount the bond (or find the future value going the other way) using the strips rates that match the payments in question.

So if you have a 10 year bond that pays coupons every year, the real way to value it is to discount the first year's payment using the strip rate for a one year, discount the second year's payment using the strip rate for a 2 year, ... up until you discount the principal payback using the 10 year strip rate...

This may be too complicated for your problem. If you want to find the FV of a bond you would also use the strip rates. Most finance classes use a single RF rate to approximate.
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New post 08 Jul 2006, 07:05
rosstbomb wrote:
If you post the actual question it would be helpful.

Pricing bonds properly usually involves "strips" where one would discount the bond (or find the future value going the other way) using the strips rates that match the payments in question.

So if you have a 10 year bond that pays coupons every year, the real way to value it is to discount the first year's payment using the strip rate for a one year, discount the second year's payment using the strip rate for a 2 year, ... up until you discount the principal payback using the 10 year strip rate...

This may be too complicated for your problem. If you want to find the FV of a bond you would also use the strip rates. Most finance classes use a single RF rate to approximate.


curious to know "strips". do strip = proportions of securities from the same firm?
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New post 08 Jul 2006, 09:59
Thanks Pals, but I'm afraid you guys misunderstand what I asked.

The future bond price I was talking about is the contract price of Future Bond, not the Future value of the Bond; as I mentioned it is derivatives.

Thanks anyway
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New post 08 Jul 2006, 12:56
Ah, i did miss that. Sorry. yes the risk free rate would be used instead of the YTM on the bond.
  [#permalink] 08 Jul 2006, 12:56
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It's about Future Bond Price. I think, similar to Future

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