“If both assets are risk-free, they should have the same discount rate.”
Can someone give a quick help pls? It should be something so easy, however I`m confused with the so called “dominance principle”…
If two assets are identical, then both should have the same price. Otherwise, arbitrage is possible.
I this case, two assets are risk-free (identical), so they should yield the same return (risk-free rate of return). Otherwise, arbitrage is possible.
So, by risk-free they mean identical… because government bonds are risk-free assets but have different maturities and coupon payments and are far to be identical…
ok, tnx a lot
They have different coupons exactly because they have different maturities. They must have the same YTM, though, otherwise arbitrage would be possible, or one of them wouldn’t be risk-free.