IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789813222755_0002.html
   My bibliography  Save this book chapter

Valuing Traditional Fixed-Rate Corporate Bonds

In: Valuation in a World of CVA, DVA, and FVA A Tutorial on Debt Securities and Interest Rate Derivatives

Author

Listed:
  • Donald J Smith

Abstract

This chapter addresses the valuation of a traditional fixed-rate corporate bond that does not have an embedded call or put option. The classic method to value the bond is discounted cash flow (DCF) analysis. Each scheduled coupon and principal payment is discounted back to Date 0 using a spot (or zero-coupon) rate that matches the time until the receipt of the cash flow and that reflects the investor’s required rate of return given the risk. For an N-period bond making N evenly-spaced coupon payments (PMT) and having the redemption of principal (FV) entirely at maturity, the price of the bond (PV) depends on the sequence of spot rates (Z1, Z2, … , ZN): PV=PMT(1+Z1)1+PMT(1+Z2)2+...+PMT + FV(1+ZN)N Often a single discount rate, known as the yield to maturity (Y), is used in lieu of the sequence of spot rates: PV=PMT(1+Y)1+PMT(1+Y)2+...+PMT + FV(1+YN)N This yield to maturity is the internal rate of return on the cash flows, the uniform discount rate such that the present value of the coupon and principal payments equals the price. This yield can be interpreted as a “weighted average” of the spot rates with most of the weight on the final cash flow as it includes the principal…

Suggested Citation

  • Donald J Smith, 2017. "Valuing Traditional Fixed-Rate Corporate Bonds," World Scientific Book Chapters, in: Valuation in a World of CVA, DVA, and FVA A Tutorial on Debt Securities and Interest Rate Derivatives, chapter 2, pages 13-45, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813222755_0002
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789813222755_0002
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789813222755_0002
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    XVA; CVA; DVA; FVA; Debt Securities; Interest Rate Derivatives;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789813222755_0002. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.