July 2011
Beginner
288 pages
7h 22m
English
Content preview from BOND MATH: The Theory Behind the FormulasBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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Bond Prices and Yields to Maturity in a World of No Arbitrage
Modern financial theory of bond pricing rests on the principle of no arbitrage. Some call this the law of one price or, even more grandly, the fundamental theorem of finance. It essentially is a theory of relative prices—the idea is that if we observe prices on some fundamental building blocks, for instance, zero-coupon bonds, we can deduce the fair prices on coupon bonds that promise the same future cash flows. We don't try to figure out the demand and supply for each bond in the marketplace. Instead we observe the market prices on the most actively traded securities and value the remainder assuming arbitrage opportunities are exploited and priced away.
No-arbitrage pricing is a powerful ...
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