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Dear sir,
In the question totluck, when valuing the bonds, we used different rates as the discount factor to calculate the value of the bond. The different rates were based on govt yield + extra depending on credit rating agencies. I was of the impression that the rates used to discount would be based on the period of the bond.For example, they used 1 year yield to discount the first year’s coupon payment, second year yield to discount the second years coupon payment and so on.
Why didn’t they just use the 3 year yield rate to discount all the coupon payments? In the other questions we always used one discount factor only such as Q Corden
Please help sir
Thank youIf we know the govt yield rates for each year, then we use them to value the bonds.
If we know the overall yield to maturity (which in a sense is the average of the individually yearly rates) then we use that to value the bonds.
The question was based on the following technical article on the ACCA website:https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/bond-valuation-yields.html
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