Overvalued Bond

[nitish3861]

[question removed by moderator]
Can anyone explain why the bond is overvalued if the expected spot rate is higher than current forward rate

 

[data storm]

because, it is discounted using the “higher expected” spot rate at each cash flow date. yeilding a lower value compared to the current one.

 

[krokodilizm]

Imagine you have to discount $100. The market discounts it at 5% so the PV=100/1.05=95.24
You believe the discount should be 10% so the PV should be 100/1.1=90.91. So you say the market is overvaluing the bond.

 

[jyho]

Expected spot rate = what the market actually is, when it happens
Forward rate = what was PERCEIVED to be the rate.
***
Step 1: Overvaluation = Perceived price > THE ACTUAL price,
Step 2: Perceived yield < Actual yield
Forward rate = perceived yield
Expected spot rate = Actual yield at ‘expected’ point of time

 

[olajideanuoluwa001]

Nice points, I also used to mix this up.. its clearer now.