Bond Yield Measurement

The discussion in Chapter 3 concentrated on how to calculate the price of a bond using an appropriate discount rate known as the bond’s yield. Our brief discussion of corporate finance project appraisal tells us that this is the same as calculating a net present value at the selected discount rate. We can use reverse this procedure to find the yield of a bond where the price is known, which would be equivalent to calculating the bond’s internal rate of return (IRR). As we saw from the previous chapter there is no equation for this calculation and a solution is obtained using numerical iteration. The IRR calculation is taken to be a bond’s yield to maturity or redemption yield and is one of various yield measures used in ...

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