Lesson 2 of 8 · All lessons in this module
- Present value and discount (zero-coupon) bondsVideo lesson
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- Valuing shares with dividend discount models
- Implied returns on bonds
- Required return, implied growth and the P/E ratio
- Cash flow additivity, no arbitrage and forward rates
- No-arbitrage pricing of FX forwards and options
Lesson 2 of 8 · 13 min
Coupon bonds and perpetual bonds
A coupon bond is a bundle of zero-coupon cash flows, so its price is every coupon and the principal discounted at one rate: the YTM.
In short
- Price = PV of every coupon + PV of the principal, all at the same market discount rate (the YTM).
- On a coupon date: coupon rate = YTM → par; coupon rate < YTM → discount; coupon rate > YTM → premium.
- Semiannual coupons: coupon ÷ 2, YTM ÷ 2, years × 2. The quoted YTM is the six-month rate × 2.
- A perpetual bond never matures: PV = PMT / r (r > 0), using the coupon and rate for the same period.
- Higher YTM → lower price, for coupon and perpetual bonds alike.
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