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Does discounting factor only depends on issuer, or it also depends on structure of payments ( i.e. fixed or float)? Thank you in advance.

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The central theme of Asset Pricing is in detecting what drives the evolution of the (stochastic) discount factor. Academic finance assume as a methodological starting point that expectations are rational, i.e. unbiased, hence when prices ( $p_t$ ) are determined as the expected value of the discounted (by the discount factor $M_{t+1}$) payoff of the security ( $X_{t+1}$ ), i.e. $p_t = E_t [M_{t+1}X_{t+1}]$, then what really drives prices is the functional form of the (stochastic) discount factor, i.e. $M_{t+1}= f(t, Z)$ .

You are asking what $Z$ is, but if I knew it exactly I could write a paper and win the Nobel Prize!

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  • $\begingroup$ I'd like to know, if a compony issues one bond with fixed coupons and one with floating coupons, then should I use the same discount factor for both bonds? $\endgroup$ – user1786577 Feb 16 '15 at 7:30

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