Question

explain in your own words

• what the word "expected" in the term "expected cash flows" means,
• what "cash flows" an investor expects to receive from a bond,
• what the third factor is and its relevance in bond valuation, ie. which part of the bond valuation formula incorporates this third factor?

Answer 1

Expected in the term "Expected cashflows" means the cashflows are future cashflows and it is an estimated cashflow based on the market expectations

From Bond typical cashflows are the regular coupon payments and the face value at the time of maturity

Discount Rate or Interest Rate is the third factor used in Bond Valuation. Discount Rate is used to calculate the Present value of coupon payments and Present value of Face value payment.