IGNOU MS 422 2017 - How do you calculate the price of a bond ? How do you measure bond pri

Question

How do you calculate the price of a bond ? How do you measure bond price volatility ?

20 Apr 2018

Answer :

Word Count : 703

To calculate the price of a bond, it is important to understand that the bond price is the present value of its future cash flows, which consist of the periodic coupon payments and the face value (or principal) that will be paid at maturity. The general formula for bond pricing is as follows:

Bond Price (P) = Σ (C / (1 + r)^t) + (FV / (1 + r)^T)

Where:

C is the coupon payment (the periodic interest payment),
r is the discount rate or required rate of return (yield),
t is the period (number of years or periods) for each coupon payment,
FV is the face value of the bond (also known as par value),
T is the total number of periods until maturity.

1. Coupon Payments (C):

Bonds usually pay a fixed coupon rate. For example, if

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