Hi guys,
I am a bit confused by why
’ if the future spot rates are expected to be lower than current forward rates for the same maturities, the bonds are undervalued’
Can someone help explain it?
Thank you in advance.
Current forward rate is like what the market says will happen
Expected future spot rates are like what could happen based on your analysis.
Assuming that future spot rates are lower than what the market expects, the price of the bond will be greater than the price that the market expects.
Thanks Benjamin. Your explanantion is very clear!
Then the analyzed bond value is higher than market value which means it’s undervalued.