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■ Government
■ Financial Institutions
■ Countries
■ Corporations
Government Bonds
D - In default.
Valuing Zero Coupon Bonds
● What is the current market price of a U.S. Treasury strip that
matures in exactly 5 years and has a face value of £1,000. The
yield to maturity is rd=7.5%.
1000
5 = £696.56
1.075
1000
591.11 = 7
1 + rd
Bond Yields and Prices
The case of zero coupon bonds
45 45 45 45 1045
45 1 1000
B= 1 − + = $937.69
0.05 1.05 20
1.05 20
Relationship Between Bond
Prices and Yields
■ Bond prices are inversely related to interest rates (or yields).
■ A bond sells at par only if its coupon rate equals the coupon
rate
■ A bond sells at a premium if its coupon is above the coupon
rate.
■ A bond sells a a discount if its coupon is below the coupon
rate.
Volatility of Coupon Bonds
Bond Price
c Yield