Bond Prices| Discount Factors| What is Arbitrage?| Financial Risk Manager Certification Video Lecture | Risk Management: An Essential Training - Management

simply learn your pace your place
financial risk manager frm par one of
the frm exam covers the fundamental
tools and techniques used in risk
management and the theories that
underlie their use bond the prices
discount factors and arbitrage welcome
to the forty second lecture in your
preparation for the frm exam in the
previous sessions we have already
learned about bonds and their pricing in
this session we will again revisit bond
pricing and extend our learning concepts
from bond pricing have regularly been
tested in the frm examination you are
therefore advised to have a thorough
understanding of the concepts of bond
cash flows discounting yield measures
spot rates and forward rates
let us begin our session
agenda the main agenda of our discussion
will be learning to calculate bond
prices using discount factors and check
for any opportunity for arbitrage we
will learn how to take advantage of the
arbitrage opportunity by constructing a
replicating portfolio using different
bonds the weights of these bonds are
taken in such a way that the cash flows
from the original bond are exactly
replicated who also learned to construct
the strict bonds using Treasury strips
such as principal strips called P strips
and coupon strips called C strips
discount factors discount factors are
used to find the present value of a
future cash flow we have already seen
that the worth of a sum of money in the
future is less than that at the present
from the time value of money concept we
therefore apply a discount factor to the
cash flow in each period in the future
to arrive at the total present value let
us learn to find the discount factor
through an example consider a zero
coupon 6-month bond trading at a current
price of $95 this bond will have a cash
flow of $100 after six months if we
multiply it with a discount factor it
should be the present value or the
current trading price of ninety five
dollars on calculation we find the
discount factor to be zero point nine
five suppose we want to find the
discount factor for more periods then we
can take another bonds maturing in one
year and discount the cash flows using
the six-month discount rate and the one
year discount rate in this case the
present value is equated to the current
price of the