Chartered Financial Analyst (CFA) Practice Exam Level 2

When forward rates are inaccurately utilized to discount a bond's future cash flows, it's likely that the calculated present value of the bond will not reflect its true worth. If the forward rates imply a higher discount rate than what is appropriate, this can result in estimating the bond's present value to be lower than it should be, leading to an undervaluation of the bond. Investors might perceive this discrepancy as an opportunity to purchase the bond at a price lower than its intrinsic value, anticipating that its true market price will eventually adjust upward as the market corrects this mispricing.

This scenario creates a potential investment opportunity, as the undervalue may attract investors who seek to capitalize on such a mispricing by acquiring the bond at a low price. Hence, using forward rates inaccurately opens the door for investment prospects based on perceived value discrepancies in the market.