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07 Jul 2006, 12:19
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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
Thanks mann
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Hi there,
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07 Jul 2006, 18:58
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siamman
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...
07 Jul 2006, 22:52
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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.
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.
