When rates are quoted using different compounding frequencies, they result in different
percentage amounts. Can you have different discount factors for the same kind of bond with the
same maturity? Why?
Solution
The rates are qouted with different componding frequencies they result a different percentage
amount. The 100 rupees with 6 % interest compounded annully and monthly definitly will give
different results. The increase in compounding frequency will definitly increase the effective rate
and return.
The discount factors used for the same kind of bond with same maturity should be same.
The discount factors is selected based on risk associated with each type of bond
The same type of bond having same maturity having same risk factor
The frequency of compounding definitly will change the effective return but it will not affect the
risk catagory of the bond. So the discount factor used should be the same