Arbitrage Bonds
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Why do bond prices assume compound interest?
Why do bond prices assume compound interest? When you receive coupons, you are not reinvesting them in the same bond. It seems to me that if everyone values bonds this way, there might be opportunity for arbitrage given that the actual interest rate will differ from the assumed one.
Any help would be great.
bonds yield non-compounding interest. but because the returns on other instruments are always measured compared to compounded interest bonds are aswell.
the prices of bonds do not just increase and decrease to current rates, they also factor in what the investors expect will happen to the future interest rates.
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