证券基础知识——与bond相关的几个知识点discount factor，Spot rates，forward rates

Fundamentals of bond valuation

The value (or price) of any financial asset-such as a bond-can be determined by summing the asset's discounted cash flows. There are three steps in the bond valuation processes:

1. Estimate the cash flows. For a bond, there are two types of cash flows: (1) the annual or semiannual coupon payments and (2) the recovery of principal at maturity, or when the bond is retired.

2. Determine the appropriate discount rate. The approximate discount rate is either the bond's yield to maturity (YTM) or a series of spot rates.

3. Calculate the PV (present value) of the estimated cash flows. The PV is determined by discounting the bond's cash flow stream by the appropriate discount rate(s).

 

(Bond valuation in wiki -- is the determination of the fair price of a bond. As with any security or capital investment, the theoretical fair value of a bond is teh present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected cash flows to the present using the approriate discount rate. In practice this discount rate is often determined by reference to other similar instruments, provided that such instruments exist.)

 

As previously noted, bond investors are entitled to two distinct types of cash flows: (1) the periodic receipt of coupon income over the life of the bond and (2) the recovery of principal (or par value) at the end of the bond's life. Thus, valuing a bond deals with an annuity of coupon payments plus a large single cash flow, as represented by the recovery of principal at maturity, or when the bond is retired. These cash flows, along with the required rate of return on the investment, are then used in a present-value-based bond valuation model to calculate the dollar price of the bond.

 

 

Forward Rates and Spot Rates

->Interest rates for different periods usually differ.

->There are two standard ways to summarize this:

##Forward rate: Tells us how much interest we earn if we agree today to invest $ from end of year t-1 to end of year t. It's the rate we earn just in period t (for one future period).

##Spot rate: Tells us the rate we earn on an annual basis if we leave our money in the bank for t years. It's a sort of average of the forward rates in periods 1,2,3,...,5.

 

 

 

 

 images from http://www.som.yale.edu/faculty/zc25/finance-core/slides/l4.pdf