Finance Ch13. Bond Valuation — The Elegance of Fixed Income
Ch 13. Bond Valuation
A bond is a certificate by which the issuer promises to pay the investor principal and interest at specified future dates. Unlike stocks, bond cash flows are predetermined — making valuation relatively straightforward in principle. But the key is understanding its dynamic relationship with market interest rates.
1. How Bond Prices Are Determined
A bond’s price is the sum of all future coupon payments and principal, discounted to present value.
2. Interactive Bond Simulation
See how a bond’s price changes as the market’s required yield (discount rate) shifts.
The Inverse Relationship Between Rates and Prices: When market interest rates rise, existing bonds become less attractive, so their prices fall. Conversely, when rates fall, bond prices rise. This is the origin of the saying: “When rates go up, bond investors weep.”
3. Types of Bond Issuance
- Par Issue: Coupon rate = Market rate (Price = Face value)
- Discount Issue: Coupon rate < Market rate (Price < Face value)
- Premium Issue: Coupon rate > Market rate (Price > Face value)
Bonds are the backbone of a stable portfolio. Understanding how bond values shift with interest rate movements is one of the most important keys to reading macroeconomic trends and financial markets.
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