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Chapter 8 Contents

Chapter 8 Contents. 1 Using Present Value Formulas to Value Known Flows 2 The Basic Building Blocks: Pure Discount Bonds 3 Coupon Bonds, Current Yield, and Yield-to-Maturity 4 Reading Bond Listings 5 Why Yields for the same Maturity Differ 6 The Behavior of Bond Prices Over Time.

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Chapter 8 Contents

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  1. Chapter 8 Contents • 1 Using Present Value Formulas to Value Known Flows • 2 The Basic Building Blocks: Pure Discount Bonds • 3 Coupon Bonds, Current Yield, and Yield-to-Maturity • 4 Reading Bond Listings • 5 Why Yields for the same Maturity Differ • 6 The Behavior of Bond Prices Over Time

  2. Bond Prices Rise as the Interest Rates Fall • Write the PV of the fixed income security as the sum terms

  3. Pure Discount Bonds • The pure discount bond is an example of the present value of a lump sum equation we analyzed in Chapter 4 • Solving this, the yield-to-maturity on a pure discount bond is given by the relationship:

  4. Pure Discount Bonds • In this equation, • P is the present value or price of the bond • F is the face or future value • n is the investment period • i is the yield-to-maturity

  5. Pure Discount Bonds

  6. Bonds Trading at Par • Bond Pricing Principle #1: (Par Bonds) • If a bond’s price equals its face value, then its yield-to-maturity = current yield = coupon rate. Proof:

  7. First Solution Method

  8. Second Solution Method

  9. The YTM of the Coupon Bond

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