From the course: Fixed Income Fundamentals
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Bond price
- [Instructor] In this section, we will examine yields and prices of bonds. Remembering that a bond is a series of periodic interest payments and a principle repayment at maturity, we can apply the same F fee and PV formulas that we covered in the financial mass course to derive price if we know the yield to maturity and vice versa. To refresh your memory, the present value is equal to the future value discounted by the interest rate or the yield to maturity, YTM in bond speak, raise the power of the number of periods. In the simple formula, we assume annual payments, but we can easily modify the equation by adding a variable F to account for more frequent payments. If we sum all the PVs, we get the total cash flow we should expect to get back over the life of the bond, discounted at the yield to maturity. Theoretically, a bond's price should be the discounted value of all future cash flows generated by a bond. It refers to the sum of the present values of all likely coupon payments…
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