November 23rd, 2004, 10:34 am
Aaron, many thanks for your reponse. I'm aware that, in order to obtain the forward price, we have to compound forward the spot price minus income, with compounding done at LIBOR. However, what I'm looking for is the current value of this forward price. To obtain this we discount the forward price back to the calculation date. I think that the end result of this calculation will give us the spot price of the bond, minus the coupon payment discounted at the appropriately shifted rate.I agree that the credit spread will in general be tenor-dependent, and that this should be taken into account when discounting the coupon. I was just seeking confirmation that the current value of the forward price comes out as the spot price minus the discounted coupon payment, with this discounting being done at the shifted rate rather than the LIBOR rate. (This is my view, but my colleague believes that the coupon should be discounted at LIBOR.)