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Home | Getting Started | Personal Finance | Q & A | Sample Portfolio | Glossary | About Us |
| Date: Tuesday 16th 2010f March 2010 07:46:57 PM |
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Q & A - Fair Value of a Bond - 11/25/2009 |
| By: Hari Wibowo |
| Name: Angela |
| Website: |
| Date posted: Wed, Nov 25, 2009 |
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Question:
When doing finance, how can I determine when to use what formula? For example, I have 4 bonds with identical coupon rate of 7.25%, but they mature on 4 different dates (2yr, 5yr, 10yr and 20 yr) If they made all coupon payments yesterday, yield curve is flat, all bonds with the same YTM of 9%, How do I determine fair price of each bond TODAY? What do I do first? |
| Answer: |
| First, bond that mature longer period will have a higher fair value if YTM is 9%. To determine fair price of each bond, we need to use the following equation as your basis; |
| c(1+r)-1 + c(1+r)-2 + c(1+r)-3 + c(1+r)-Y + B(1+r)-Y = P |
| Where: |
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c = annual coupon payment (in dollars,
not a percent) Y = number of years to maturity B = par value P = purchase price |
| Go ahead and try to use this equation to find out the fair value of each bond. |
| Hari - Novice Investing |
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END |
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Hmm, I am confused. And I have questions |
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I'm fine, thanks. Bring me back to main page |
| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities. |
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