Interview Question: Discount What?

Sample Question #3 (finance – bond pricing)
 
I don’t know anything about bond pricing, but I’ve heard people use something called the discount rate when they price bonds. Can you explain what this "discount rate" is? Why is it important? Where do I get its value? What is the current discount rate (as of today)? When I price a 30-year bond, should I use today’s discount rate or should I use a different discount rate for each of the next 30 years?
 
(Comment: typical set of basic questions asked at a lot of quant interviews, not just those for fixed income-related positions)
 
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3 Responses to Interview Question: Discount What?

  1. Wu Chao says:

    This depends on the interest rates, right? So we should use a different discount. I just read this stuff and need some time to digest it.

  2. Ming says:

    These questions look fundamental yet very interesting.
    Are you going to post the "standard" answers? Preferably, the explanations too.
     
    Thanks for the blog…

  3. Brett says:

    Hi, Pointless-ness.  Thanks for your comment.  Yes, the questions so far are pretty fundamental, but I think representative of the difficulty level of most quant interview questions.  I’ll post some tough ones, but you’ll be interested to know that most candidates fail to answer such fundamental questions.
     
    Most of the answers can be found in standard textbooks or worked out quickly.  But I’ll archive these questions and some answers on the book’s companion site http://www.quantcareer.com in the future.
     
    In the meantime, enjoy the questions and try to solve them on your own.  🙂
     
    -brett

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