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Design & Copyright |
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Determining the price of bonds
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Consultancy |
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Actuarial & Financial Information Systems
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The Price of Bonds (from: samples | K | Show | Bonds) Free Download (190Kb) See also: Most recent article Valuation of bond prices is a big thing at Wall Street and at investment departments of every institutional investor, like insurance companies, pension funds, etc. Buying bonds entitles one to receiving the principal at a given date, plus the contractual interest payments, i.e. coupons. This, being called the cashflow, has a value, depending on quite a few parameters. which include the principal, the contractual interest rate, frequency of coupons (usually 2), redemption scheme (at once, linear, annuity, etc), date of closure, date of (starting) redemption and maturity date. The technique of determination of prices of bonds is known as "Mathematics of Finance" or "Mathematics of Investment" The general formula x = H + iL can be considered from different view points: - sum of present values of redemption and intrest - price as deviation from par, i.e. the present value of the difference between interest rate and yield - price related to a non-repayable loan; here the formulae will always show up as: i/r + ..., since i/r is the price of a non-repayable loan. Type (3) is the most practical one for calculations, since it only needs flat annuities, rather than incremental or decremental ones, like needed in Type (1) and (2), and which I used for the functions in the K-script. Further it's an interesting (mathematical) exercise to express a given formula from one type into one of another. E.g. the price of an annuity is easy: an(i)/an(r). But expressing this in one of type (1) for example, means headaches!
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