Chapter 6 Bonds and Bond Valuation

AT a Glance

  1. LO1 Understand basic bond terminology and apply the time value of money equation in pricing bonds.

    A bond is a long-term debt instrument in which a borrower agrees to pay back the loaned funds (principal) with interest on specific dates in the future. The key components of a bond are its par value, coupon rate and coupon, maturity date, and yield to maturity. Bonds are priced with a lump-sum time value of money equation for the par value and an annuity time value of money equation for the coupon payments. The discount rate in the equation is the yield to maturity of the bond. This yield is the return ...

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