Bonds (investments) and valuation
Bonds and their pricing (investments)
A bond is the security that pays a pre-stated amount of interest to be investor, till the period, it is retrieved or called back. Such a bond is issued by the state or by a corporation.
A bond has a face value and a coupon rate.
- A face value is the stated value of the instrument.
- A coupon rate is the rate of interest tagged to the instrument or the bond.
Perpetual bonds
The perpetual bonds are rare and unique and they never mature. The present value is the discounted value of the infinite cash flows arising out of the interest payments.
Non zero coupon bonds
These bonds come with a maturity period unlike the perpetual bonds. The interest (coupon rate) is paid out yearly/half yearly/quarterly and at the end of the maturity period the face value of the instrument is paid out.
Zero coupon bonds
Unlike their cousins (non-zero coupon bonds), the zero coupon bonds have zero periodic cash flows. The future cash flows arising out of the coupon rate is discounted to the present value along with the maturity value to arrive at the price at which the bond would sell in the present time. In other words, the present purchase price of a zero coupon bond is the discounted value of all cash flows arising out of a non-zero coupon bond.
