alleryStart learning →In arbitrage-free pricing, each bond cash flow is discounted at what?
AThe bond's coupon rate
BA matching zero-coupon rate
CThe average dividend yield
DOne flat inflation rate
Answer & Solution
Correct answer: B. A matching zero-coupon rate
The bond is viewed as a package of cash flows, each discounted at the rate implied by a zero-coupon of the same maturity and credit quality.
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