Why do bond prices assume compound interest?
Why do bond prices assume compound interest? When you receive coupons, you are not reinvesting them in the same bond. It seems to me that if everyone values bonds this way, there might be opportunity for arbitrage given that the actual interest rate will differ from the assumed one.
Any help would be great.
Bond best answer:
Answer by mrzwink
bonds yield non-compounding interest. but because the returns on other instruments are always measured compared to compounded interest bonds are aswell.
the prices of bonds do not just increase and decrease to current rates, they also factor in what the investors expect will happen to the future interest rates.
Bond
Ralph Lauren, New Bond Street, London.
Image by Kaustav Bhattacharya
As I was walking down Bond Street, London, the 2007 Christmas decorations adorning the facade of the Ralf Lauren store attracted my attention so I snapped off a quick photo. I hope you like it!
- Camera phone upload powered by ShoZu
Orignal From: Why do bond prices assume compound interest? and Ralph Lauren, New Bond Street, London.
No comments:
Post a Comment