Chapter 8 Contents

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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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Bond Prices Rise as the Interest Rates Fall

• Write the PV of the fixed income security as the
  sum terms

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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

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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

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Pure Discount Bonds
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Bonds Trading at Par

• Bond Pricing Principle 1 (Par Bonds)
• If a bonds price equals its face value, then its
  yield-to-maturity current yield coupon rate.
  Proof

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First Solution Method
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Second Solution Method
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The YTM of the Coupon Bond
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