Financial Management: Principles and Applications, 13/e

9.3 Bond Valuation: Four Key Relationships

We can now calculate the value of a bond using the discounted cash flow method. To do this, we need to know (1) the bond’s interest payments, (2) its par value, (3) its term to maturity, and (4) the appropriate discount rate.

As we discuss next, bond values react in predictable ways to changes in market conditions. We summarize four bond valuation phenomena in terms of four very important relationships.

Relationship 1

The value of a bond is inversely related to changes in the market’s required yield to maturity.

When market interest rates increase, the value of the bond decreases, and vice versa. When market interest rates go up, the market’s required yield to maturity of the bond must also go up. However, ...