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.

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

The questions you're being asked are very basic "finance 101" questions. if you expect to be asked more questions like that in the future, you would do well to read through an investments textbook---look around on amazon to get an idea of what books people tend to read---and to start reading a financial newspaper a couple of times a week, like the Financial Times or the Wall Street Journal. Reading through a textbook might sound daunting, but I guarantee you that it will be a much easier read than your average analytic number theory paper!Also, if you're applying for quant jobs, you should at least read the Hull textbook "Options, Futures and Other Derivatives" (especially the middle chapters on options leading up to the derivation of the Black-Scholes formula) and the brainteaser textbook "Heard on the Street" by Timothy Crack. Regarding the latter, you'd quite be surprised how often firms ask the same brainteasers over and over again.

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

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!

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

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

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

I believe the word I'm looking for isaaaahhhhhhaa!!nice one.

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.

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.

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.

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

They are different because they mean different things!

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

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