Chapter 17. Bond Pricing and Duration

Bonds arc key instruments used by corporations, governments, and various Other entities for financing, and the bond market is a major part of our capital market. Bonds come in bewildering varieties, but they can be distinguished from one another and priced on the basis of a few characteristics. Because the bond market is so huge and bonds are used in one form or another by most players in the financial markets—from individuals to institutions—how bonds are priced and how the price should vary as interest rate and other factors change is of great interest.

In this chapter we will develop a few basic models to understand bonds and their characteristics. Excel has a number of built-in functions for valuing bonds and studying their characteristics, some of which are similar to the models we will develop. It is likely that in the future you will use these functions more often for bond analysis. Nonetheless, you will develop a much better understanding of bonds by working through these models. In addition, they will enhance your understanding of the concept of time value of money and help you improve your modeling skills.

Review of Theory and Concepts

A bond is a contract or instrument under which the issuer borrows money from lenders and agrees to make one or more payments of interest and principal on specific dates to the holder of the bond. The issuers of bonds range from the U.S. Treasury to corporations, municipalities, and others.


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