Ss12. Reading 35. EOC 39 and 40.
while calculating the price of a bond, in example 39. they have just added z spread to the four year discount rate and discounted it 4 times. However, in example 40, they are adding the z spread to all previous spot rates.
I don’t understand which method applies when! What am I missing?
In #39 they’re talking about a 4-year, zero-coupon bond, so there’s _ only one _ spot rate that matters: the 4-year rate.
In #40 they’re talking about a 2-year, coupon-paying bond, so _ both the 1-year and 2-year _ spot rates matter.
Goodness gracious, I’ve turned blind. Thanks a lot, magician.
We all do at one point or another.
You’re quite welcome.