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Investment & Portfolio ManagementVALUING BONDS: BASIC PRINCIPLES Instructor: M.Jibran Sheikhjibransheikh@comsats.edu.pkThe value or market price of a bond depends on how much investors are prepared to pay for the interest payments and the return of the principal which the bond promises to pay. This can be determined as the present value of the expected cash flows. If we can simplify for a moment and assume that the cash flows are certain, interest payments are made annually and there is a single rate that is appropriate for discounting all of the cash flows that a bond holder can anticipate, the value of a bond can be determined as: Formula

The discount rate is given by the market determined rate of return that can be expected on bonds of the same maturity, coupon rate and risk. The valuation equation assumes that the bond is being valued immediately following the receipt of an interest payment. Example A bond with a nominal value of 1 00 issued four years ago has six years to run to maturity. It carries a coupon interest rate of 8 per cent, but bonds issued today with six years to maturity are offering an interest rate of only 5 per cent.

Why bond is selling above its par value?????????????

Yield to MaturityThe yield to maturity is the discount rate that equates the present value of the expected cash flows from holding a bond with its current price

Where rcB = for coupon interest rate of bondy =is the yield on a bond, and it is usually assumed that this is derived on the basis of an equilibrium price for a bond, and therefore the yield constitutes the market rate of return on the bond in question