4.2 Bond Valuation

This section introduces you to the valuation of the most basic financial interest in a business - debt instruments or bonds. Bonds come in many flavors, but share a common characteristic. They are contractual promises to pay principal and interest on a fixed schedule. Unlike common stock whose dividends are not specified in advance, a bond promises specified cash flows to the investor.

4.2.1 - Bond fundamentals

Bonds are long-term debt instruments used by business firms and governments to raise money. Most bonds pay interest semiannually at a stated interest rate with an initial maturity of 10 to 30 years with a face value of $1,000 that must be repaid at maturity. (More 4.2.1>>)

4.2.2 - Basic bond valuation

Using a basic bond valuation formula, you can determine the price at which the bond should trade. (More 4.2.2>>)

4.2.3 - Behavior of bond values

Bond prices move inversely with interest rates. That is, there is a relationship between required return (yield) and bond prices. Why does this happen? (More 4.2.3>>)

4.2.4 - Yield to maturity

Bond investors commonly look at yield to maturity (YTM) -- the rate of return the bond offers at a specified price, if held to maturity. By computing bonds' YTM, it is possible to compare bonds with different coupon rates and prices. (More 4.2.4>>)