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Hi John,
Just want to clarify, when we value a bond and the question gives use the government risk free rate and the company specific risk premium we will use that to combination determine the value.
However if we are given the risk premium in a table which states the premium for each year say 5 years for a AA rated company and the bond we are valuing is a 5 year bond, do we determine the YTM by simply adding the 5th year risk premium to the risk free rate or rather at each years risk premium to the the risk free rate and discount each of the 5 years by a different YTM rate? so for example the risk free rate is 5% and year 1 risk premium is 0.5 and year 2 is 0.6 we will discount year 1 at 5.5 and discount year 2 at 5.6 and so on..
It slightly depends on the wording, but usually you would discount each year separately (as in your last sentence).
(Sorry for not answering sooner – I must have missed your original question 🙁 )
Thanks so much John, and not a problem at all I know you have many questions flying at you.
Thanks for taking the time to answer mine.
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