The previously analyzed example to characterize the bonds with several variables. However, the analysis was not complete, because the determination of clean and dirty prices and the profitability of the nominal and actual parameters are not sufficient to obtain information about the profitability of investments in bonds in its full term - or even the price they would pay to get a certain profitability. More sophisticated methods, which, however, allow you to fully evaluate the investment, based on the valuation of the bonds using the tools of financial mathematics.

The value of bonds is determined as the sum of the discounted cash flows of income that will be received in the future under the ownership of the bonds.

In the case of cash flows, interest income includes coupons along with the proceeds of the redemption of the bonds, which is most often the nominal value of the bonds. The discount rate is the average yield to maturity of the bond (YTM).

Thus, the valuation of bonds is based on the following formula:

P = C1 / ?(1 + YTM)? ^ 1 + C2 / ?(1 + YTM)? ^ 2 + ? + (Cn + Wn) / ?(1 + YTM)? ^ n

where:

C1, C2, ..., Cn denote the size of the coupon payments
Interior redemption value (as a rule it is the nominal value)
YTM is the rate of return to maturity
n is the number of interest periods

Main page Other posts