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

Bond Prices Rise as the Interest Rates Fall Write the PV of the fixed income security as the sum terms

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:

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

Pure Discount Bonds

Bonds Trading at Par Bond Pricing Principle #1: (Par Bonds) If a bond’s price equals its face value, then its yield-to-maturity = current yield = coupon rate. Proof:

First Solution Method

Second Solution Method

The YTM of the Coupon Bond