SERVING THE QUANTITATIVE FINANCE COMMUNITY

d32
Topic Author
Posts: 75
Joined: May 24th, 2006, 10:57 pm

On an interview I was asked questions that went something like this...- If a 5 year zero coupon bond that receives $100 at maturity. (I think the interviewer said yield to maturity was 5%?) Risk free interest rate is 4% p.a. How much would the bond be trading at?- How is the volatility of Google's stocks compare with the volatility of Walmart's stocks.I still can't seem to answer those. Any help would be great. gardener3 Posts: 1496 Joined: April 5th, 2004, 3:25 pm ### Some questions QuoteOriginally posted by: d32On an interview I was asked questions that went something like this...- If a 5 year zero coupon bond that receives$100 at maturity. (I think the interviewer said yield to maturity was 5%?) Risk free interest rate is 4% p.a. How much would the bond be trading at?Remember the present value formula: Cash Flow / (1+discount rate)^(time to maturity)Quote- How is the volatility of Google's stocks compare with the volatility of Walmart's stocks.intuitively: which company is more established?, which on has greater uncertainty about its future cash flows? you can also calculate the volatilities by downloading their returns from finance.yahoo.com

gentinex
Posts: 143
Joined: June 8th, 2006, 1:16 pm

### Some questions

Last edited by gentinex on October 20th, 2006, 10:00 pm, edited 1 time in total.

d32
Topic Author
Posts: 75
Joined: May 24th, 2006, 10:57 pm

### Some questions

Thanks gentinex. I've been reading through Hull and Crack for quite sometime already, and I understand the concepts. That said, after that interview I noticed that I have to figure out the simple concepts first.This sucks, cuz I can understand BS, martingales, etc., but I can't even value a bond!

gentinex
Posts: 143
Joined: June 8th, 2006, 1:16 pm

### Some questions

By the way, there are a handful of simple bond brainteasers in the third chapter of Crack.

lytesaber
Posts: 28
Joined: March 24th, 2005, 10:15 pm

### Some questions

So where does the yield to maturity fit in then? Normally I think of ytm as a proxy for price. If you figured out the your discount factors using the ytm and discounted all your cashflows using those it should equal the price you are trading at. If the ytm is higher than your coupon bond price will be less than 100 and vice versa. But for a zero coupon bond shouldn't it just be same as the risk free rate? Or have I completely misunderstood? Thanks

Alii
Posts: 38
Joined: July 24th, 2006, 3:16 pm

### Some questions

credit risk

rmeenaks
Posts: 186
Joined: May 1st, 2006, 2:31 pm

BINGO! Its the credit risk that makes the rate higher than the risk free rate. You may or may not get that $100 upon maturity. Because of that, the YTM is higher than the risk-free rate....Cheers,Ram lytesaber Posts: 28 Joined: March 24th, 2005, 10:15 pm ### Some questions I believe the word I'm looking for isaaaahhhhhhaa!!nice one. CactusMan Posts: 2990 Joined: October 27th, 2005, 8:26 pm ### Some questions Right, as an extreme case: Let's say your neighbor promises you$100 in 5 years. That bond cannot have the same value as the U.S. Government promising you $100 in 5 years, right?The U.S. Government is the most credit worthy borrower in the world, your neighbor is just some guy. The different credit risks give different discount factors, and hence the lower value for your neighbor's promise to pay$100.
Last edited by CactusMan on October 22nd, 2006, 10:00 pm, edited 1 time in total.

shuwang
Posts: 7
Joined: July 26th, 2006, 7:09 pm

### Some questions

for the method for pricing a bond, check the textbook "the theory of interest" by Kellison. The interest or yield is a constant here. the idea is simple. only the different names are confusing.

CactusMan
Posts: 2990
Joined: October 27th, 2005, 8:26 pm

### Some questions

QuoteOriginally posted by: shuwang...the idea is simple...only the different names are confusing. And what is the idea? What do you mean "different names are confusing"? It certainly is not just a matter of names.I wouldn't recommend Kellison, by the way. I know a lot of books that give a much more current treatment.
Last edited by CactusMan on October 26th, 2006, 10:00 pm, edited 1 time in total.

rmeenaks
Posts: 186
Joined: May 1st, 2006, 2:31 pm

### Some questions

The names are totally different. The only thing similar about them is that it is a discounting rate. Ram

CactusMan
Posts: 2990
Joined: October 27th, 2005, 8:26 pm

### Some questions

They are different because they mean different things!

rmeenaks
Posts: 186
Joined: May 1st, 2006, 2:31 pm

### Some questions

Right, but they are both discounting rates. I suspect that is what he meant by "same thing"....Ram

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