Bond Valuations Flashcards
(17 cards)
What is a bond?
A bond is a debt security issued by governments or corporations to raise funds, in exchange for promised payments (coupons and face value) until maturity.
what is Face Value (FV):
Principal repaid at maturity (e.g., $1,000).
what is coupon rate
APR set by issuer, determines periodic interest payments.
what is a term
: Time from issuance to maturity.
what are coupons
Periodic interest payments (e.g., semi-annual, annual).
How to calculate the Coupon Payment (CPN)?
CPN = (coupon rate x face value)/number of payments per year
What is a Zero-Coupon Bond?
A bond sold at a discount that pays no coupons—only face value at maturity.
Returns come from the price difference between purchase and maturity value.
How to Calculate Price of a Zero-Coupon Bond?
P - FV/ (1+YTM)^n
p = price FV = face value YTM = yield to maturity for n periods
n = number of periods
How to Calculate YTM of a Zero-Coupon Bond?
YTM = (FV/P)^(1/n)-1
What is a Coupon Bond?
A bond that pays regular coupon payments and returns the face value at maturity. Returns include both coupons and price differences from face value.
. How to Calculate Coupon Bond Price (from YTM)?
P = CPN x ((1-1/(1+y)^n))/y) + (FV/(1+y)^n)
CPN = coupon payment y = YTM per period n= total periods
How to Calculate Coupon Bond YTM?
Solve for y in the price formula above (usually done via trial, error, or Excel using =RATE(n, CPN, -P, FV)).
Why Do Bond Prices Change?
Passage of time—approaching maturity reduces price uncertainty.
Changes in market interest rates—affects demand and required yield.
Relationship Between Coupon Rate, Price, and YTM
Price > Par: Coupon rate > YTM (premium bond).
Price = Par: Coupon rate = YTM.
Price < Par: Coupon rate < YTM (discount bond).
What is the Term Structure of Interest Rates?
Shows the relationship between interest rates (YTM) and bond maturities. Used in pricing bonds and forecasting economic conditions.
Theories Explaining Term Structure
Expectations Theory: Long-term rates reflect expected future short-term rates.
Liquidity Preference Theory: Investors demand premium for longer maturities.
Preferred Habitat Theory: Investors prefer certain maturities, affecting the curve shape.
Important Notations (FV, CPN, Po, PV, YTM, n)
FV: Face Value
CPN: Coupon Payment
P₀: Bond Price
PV: Present Value
YTM: Yield to Maturity
n: Number of periods to maturity
