Lecture 2: Pricing bonds, Price-yield, measuring yield

Question 1

Price of a bond = ?

Answer 1

PV annuity due + discounted principal paid at maturity

Question 2

Fundamental property of price - yield relationship

Answer 2

bond price changes in opposite direction from change in required yield (YTM)
- Reason being that bond is the present value of the cash flows. raise in required yield discounts at higher rate.

Question 3

Measuring yield for zero coupon bonds

Answer 3

Y = (M/P)^1/n - 1
where:
M = principal
P = Price