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Bond valuation is the process by which an investor arrives at an estimate of the theoretical fair value, or intrinsic worth, of a bond.As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate.
The investor receives payment for the face value of the bond plus the interest the bond earned before the call date. Investors might also receive a call premium, which is the amount over the ...
When you think about investing, your mind may automatically default to investing in stocks. But stocks are just one of many different asset classes investors have the opportunity to put their ...
Interest payments are the primary way bonds generate returns for investors.
Yield to put (YTP): same as yield to call, but when the bond holder has the option to sell the bond back to the issuer at a fixed price on specified date. Yield to worst (YTW): when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of yield to maturity, yield to call, yield to put, and others.
In finance, a bond is a type of security under which the issuer owes the holder a debt, and is obliged – depending on the terms – to provide cash flow to the creditor (e.g. repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest (called the coupon) over a specified amount of time. [1]
On a fixed-rate bond, for example, the coupon might be 5 percent, so the bondholder would earn $50 annually for every $1,000 in face value of bonds, a typical cost for a bond.
Thus if we have an interest rate model in which we are able to value bond puts, we can value interest rate caps. Similarly a floor is equivalent to a certain bond call. Several popular short-rate models, such as the Hull–White model have this degree of tractability. Thus we can value caps and floors in those models.
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