The meaning of Interest Rates - Bond Cash Flows, Prices, and Yields
9 important questions on The meaning of Interest Rates - Bond Cash Flows, Prices, and Yields
What is a bond certificate
What is a maturity date
What is a zero-coupon bond
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What are the criteria of a zero-coupon bond?
- always sells at a discount (a price lower than face value)--> also called pure discount bonds
- Treasury bills are U.S. Government zero-coupon bonds with maturity of up to one year
What is the Yield to maturity?
What are risk-free interest rates?
on date n provides a risk-free return over the
same period. Thus, the Law of One Price
guarantees that the risk-free interest rate equals the yield to maturity on such a bond.
What is a Zero-Coupon Yield Curve
What is the YTM formula?
Consider the following semi-annual bond:
• $1000 par value
• 7 years until maturity
• 9% coupon rate
• Price is $1,080.55
What is the bond's yield to maturity?
– PMT = (9% x $1000)/ 2 = $45
...= 7.5%
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