FINC2011 Chap.4 Bond Valuation and Yield
Bond Valuation and Yield
Bond valuation combines a coupon annuity with the present value of face value. The chapter distinguishes coupon rate from market yield, converts semiannual conventions correctly, classifies bonds as premium, par, or discount, and interprets credit spreads and interest-rate sensitivity.
It also flags that formal duration calculation is outside the captured FINC2011 scope while preserving the qualitative maturity and coupon relationships the teaching materials use.
What this chapter covers
- 01
Coupon and face-value cash flows
- 02
Yield per payment period
- 03
Premium, par and discount classification
- 04
Semiannual bond valuation
- 05
Credit spreads and bond ratings
- 06
Maturity and coupon sensitivity
- 07
Settlement between coupon dates
Worked example · free
Price and classify a coupon bond
- 1Predict a discount because the coupon rate is below the market yield.
- 1Value the $7.50 annual coupon stream for four years at 8.5%, giving $24.80.
- 1Discount the $100 face value for four years at 8.5%, giving $72.17.
- 1Add the two present values to obtain a bond price of $96.97.
- 1Confirm that $96.97 lies below face value, consistent with the prior classification.
Key terms
- Coupon Rate
- The contractual annual percentage of face value used to determine a bond's coupon payments.
- Face Value
- The principal amount promised to the bondholder at maturity and used to calculate coupons.
- Credit Spread
- The yield difference between a risky bond and a benchmark security with a comparable maturity and convention.
- Discount Bond
- A bond priced below face value, commonly because market yield exceeds its coupon rate.
Bond Valuation and Yield FAQ
Why do bond prices move opposite yields?
A bond's promised coupons and face value are fixed. When the market required return rises, those same cash flows are discounted more heavily and price falls. When required return falls, their present value rises. The inverse relation follows directly from discounting.
How are semiannual bonds handled?
Divide the quoted annual coupon rate by two to find each coupon, divide a semiannually compounded APR yield by two for the periodic discount rate, and multiply years by two for the period count. All three inputs must share half-year units.
What makes one bond more rate-sensitive?
Holding other features constant, longer maturity and lower coupons place more value in distant cash flows. A yield change then has a larger present-value effect. The course materials use this qualitative relationship while identifying formal bond duration calculation as beyond the unit's scope.
Exam move
Use a four-line bond set-up: coupon per period, yield per period, number of periods, and face value. Predict premium, par, or discount before entering the formula. Calculate coupon and principal components separately so a period error can be located. Drill the inverse yield-price relationship by repricing one bond at three yields.
For credit-spread questions, confirm that the benchmark and corporate yields share maturity and compounding convention before subtracting. Keep formal duration formulas out of your FINC2011 answer unless the current teaching materials explicitly add them; use the supported qualitative sensitivity explanation instead. Expand the four-line set-up into a contract audit.
Mark which input determines promised cash, which determines discounting, and which determines the number of dates. A new market yield does not change the contractual coupon. For semiannual bonds, divide annual coupon dollars and quoted APR yield consistently and multiply years by two. After pricing, calculate the distance from face value and connect it to the coupon-yield comparison.
Reprice the same cash flows after a one-percentage-point rise and fall in yield, keeping every contractual input fixed. Compare a short and long maturity to explain why distant cash flows react more strongly, and compare a high-coupon bond with a low-coupon bond to see how value concentrated at maturity affects sensitivity.
Use pull-to-par as a separate check: with yield and credit quality held constant, a premium or discount should converge toward face value as maturity approaches. For a credit spread, match maturity, currency, date, and compounding convention before subtracting yields.
Interpret the result as extra required return that may contain default, recovery, and liquidity compensation; do not call it a direct probability of default without a model. If settlement occurs between coupons, sketch the neighbouring coupon dates and state whether the requested price includes accrued interest.
End every solution with price classification, yield direction, and one sentence about the assumption being held constant. Create a compact comparison grid for coupon rate versus yield, short versus long maturity, and high versus low coupon. Predict each direction before calculating.
Where a prediction fails, isolate whether the cause is frequency conversion, a missing principal payment, or a changed cash-flow assumption rather than repeating the same calculator entry.
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