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Basic Bond Pricing

 

Discount at constant rate applied to all cash flows (YTM) to find all future cash flows' PV


Treat each cash flow as a single zero-coupon bond & find PV of each bond using appropriate spot rates for each cash flow. Prices must be the same to prevent arbitrage.


 


 

 

Callable Bond Value = Value of Option free bond – value of embedded call option.

 

Example

What is the market price of a ten year, $1,000 bond with a 5% coupon paid annually,
if the bond's yield-to-maturity is 6%?

Solution


= 50/1.061 + 50/1.062 +……….+1050/1.0610 
= 926.40

Using Calculator:
Y=6%, T=10, PMT=50, FV=1000
CMP PV -> -926.40
 

 

 

 

 

 





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