If the forward rates higher than expected future spot rates the market price of the bond will be higher than its intrinsic value
“market price of the bond will be higher than its intrinsic value” is equivalent to saying the bond is overpriced.
This is a true statement. Recall that high interest rates will reduce the price of the bond. Everybody expects the rates to be lower, so everybody is pricing the bond higher than they should.
No: the market price will be lower than intrinsic value because you’re discounting at forward rates that are too high.
I am new to Fixed Income thinking so I need to dumb it down and think in basics to get the directionality right. Here is how I think about it:
If I think that forward rates are pointing higher than I expect future rates to be, then I am buying bonds. I buy when bonds are undervalued.
Algebraically it is the discount rates that causes this (beginning sections of Reading #43), but I am just using basic logic to work through these tryoes of questions.
Since forward rates pretty much always point higher with a non-inverted yiled curve, it seems that maybe bonds are always overvalued. I *think* that the non-Pure Expectation theories of the Term Structure attempt to address this. I just haven’t done the deep thinking on this stuff, yet.
Like most of you, even i think it should be underpriced. but know what…the statement is an answer to a particular question. … 