2
1. year
2. year
3. year
4.. year
5. year
Valuation of a bond 1/3
•”The price paid for any asset should reflect the cash
flows that asset is expected to generate”. E.g. ordinary government bond, with 5 years
maturity and 5% coupon rate is
valued in a following manner as the market interest rate is 5%:
Bond
market
value
100
Bond
nominal
value
100
Bond coupon rate =
market interest rate
Interest rate 5%
Coupon rate 5%
