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Spot rates for corporate bonds

We use spot rates to get an arbitrage-free value for govt bonds (risk- free bonds). But, why do we use the same spot rates to value corporate bonds which carry credit risk ? Shouldn’t we use higher rates?

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dishantgakhar wrote:
We use spot rates to get an arbitrage-free value for govt bonds (risk- free bonds). But, why do we use the same spot rates to value corporate bonds which carry credit risk?

We don’t.

dishantgakhar wrote:
Shouldn’t we use higher rates?

We do.

Perhaps you’ve heard of the z-spread?

Simplify the complicated side; don't complify the simplicated side.

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We use the govt. spot rates, but add a spread called Z-spread, and you can adjust the bond values at each node for a bond with an embedded option and calculate the OAS (which excludes the spread for the option).

Cash is a fact, profit is an opinion

Got it. Thanks

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/