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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Chapter 3: Prices and Yields on Coupon Bonds

Equation 3.4 is the standard relationship between the price of a fixed-income bond, PV, and its yield to maturity, y. The evenly spaced coupon payments of PMT each period and principal redemption of FV are discounted over the N periods to maturity. That equation is rewritten here.

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The present value of the stream of coupon payments, in brackets, is the sum of a finite geometric series. Define that to be SUM.

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Divide both sides of this equation by (1 + y).

Subtract A3.3 from A3.2. Notice that most of the ...

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