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Basic Features of Bond Structures

Indenture: Agreement containing the terms under which money is borrowed.

Term to Maturity: Length of time until loan contract or agreement expires

Par Value: Amount borrower promises to pay on or before maturity date of the issue.

Coupon Rate: When multiplied by par value, gives amt of interest to be paid each period.

Zero-Coupon Bonds: No interest; bonds are sold at a deep discount to their par values.

To derive a bond's value using spot rates, discount the individual cash flows by benchmark rate for each flow's time horizon. Sum of PV of the cash flow is bond's current value. This value is the arbitrage free value.

Given the following spot rates calculate the value of 3 year, 6% treasury bond?
1 year – 5%      2 year – 5.5%   3 year– 6%


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