# Bond Pricing (Valuing Bonds)

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The value or price of a bond can be calculated as the present value of all the cash flows that will received by the bond holder. Suppose that a 4-year bond with a face value of \$100 provides an annual coupon at the rate of 8% per annum. The cash flow from the bond is as follows:

 Time (in years) 1 2 3 4 Cash Payments \$8 \$8 \$8 \$108

NOTE: At the end of fourth year the bond holder will receive coupon and principal.

We can find value of the bond by calculating present value of the cash flow (suppose interest rate is 5% per annum).

Now, suppose that a 3-year bond with a face value of \$100 provides a bi-annual coupon at the rate of 6% per annum. The cash flow from the bond is as follows:

 Time (in years) 0.5 1.0 1.5 2.0 2.5 3.0 Cash Payments \$6 \$6 \$6 \$6 \$6 \$106

We can find value of the bond by calculating present value of the cash flow (again suppose interest rate is 5% per annum)

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