Chapter 2 Martellini Lecture

Chapter 2 Martellini Lecture - CHAPTER 2 MARTELLINI, et....

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CHAPTER 2 MARTELLINI, et. al. BOND PRICES AND YIELDS INTRODUCTION TO BOND PRICING Bond pricing is a three step processes: 1. obtain the cash flows the bondholder/lender is entitled to 2. obtain the discount rates for the maturities corresponding to the cash flow dates 3. obtain the bond price as the discounted value of the cash flows Key factors to know about the bond: bond’s maturity date the coupon rate Formula to calculate the present value of the cash flow of the bond’s interest payments: PV(CF t ) = B(0, t) CF t OR PV(CF t ) = PVIF i, N ) CF t PRESENT VALUE FORMULA The key idea is to discount the value of the funds that will be received in the future. How much will you have today, and then invest that amount at a certain rate in order to have the amount you seek to have, or desire, in the future. Formula for Present Value: PV = 1 / (1 + i) N To calculate the present value of a bond given that all cash flows and discount rates across various maturities are the same and, respectively, equal to cash flow (CF) and

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This note was uploaded on 04/07/2012 for the course ECONOMICS 101 taught by Professor Tillet during the Spring '12 term at Broward College.

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Chapter 2 Martellini Lecture - CHAPTER 2 MARTELLINI, et....

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