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the method used in valuing bond in this question is different from the method i used to know. The method used involves using different government rates to discount coupon for different years, This is different from the one we use just one discount rate (cost of debt) to discount coupons, Please, at what time do we use the method used in this question 33 to value bond?
Thank you
You discount the future interest receipts at the yield curve rates (as adjusted by the credit spread) for each individual year. However you can only do this if you know the yield curve rates.
In most questions you are not given them and therefore there is no choice but to assume that the required return stays unchanged and is the same for all time periods.(We use the pre-tax cost of debt always – the cost of debt to the company is obviously lower because they get tax relief on the interest, whereas the investors (who determine the market value) do not get tax relief).
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