Calculate the fair price of a fixed-coupon bond using present value of cash flows.
Formula: Price = Σ[C/(1+y)^t] + F/(1+y)^n C = coupon payment per period, y = yield per period, F = face value, n = total periods
Bond Pricing Basics
A bond's price is the present value of all future cash flows (coupon payments + face value at maturity) discounted at the yield to maturity (YTM). When YTM > coupon rate, the bond trades at a discount. When YTM < coupon rate, it trades at a premium.
Price vs Yield Relationship
Par: Price = Face Value (coupon rate = YTM)
Premium: Price > Face Value (coupon rate > YTM) — investors pay more for higher coupons
Discount: Price < Face Value (coupon rate < YTM) — lower coupon demands a lower price
Key Concepts
Duration: Measures price sensitivity to interest rate changes. Longer duration = more price volatility. A bond with 7-year duration drops ~7% if rates rise 1%.