Fixed-Income Bond Valuation: Prices and Yields

We will now use discounted cash flow analysis to calculate bond prices and show how the discount rate used as well as a bond’s features, such as its coupon rate and time-to-maturity, affect pricing. The price of a bond and its future cash flows can be used calculate an internal rate of return, known as the yield-to-maturity, which serves as a useful return measure for fixed-income investors under certain assumptions. One of these assumptions that applies to this learning module is that all bond interest and principal cash flows occur as promised. We will explore the relationship between bond prices and bond features, showing how different features affect a bond’s price, and demonstrate pricing both on and between bond coupon dates. Finally, we will introduce matrix pricing, which uses comparable bonds to estimate a bond’s price and yield-to-maturity when neither is known.