Question

List and describe the 3 variables needed to value a straight fixed-rate bond.

Answer 1

Straight fixed-rate bond is one of the most popular and simple structured bond. These bonds have a fixed maturity date and the principal of the bond is promised to be repaid. A fixed coupon will be paid as interest annually to the bondholders.

The value of bond can be explained by use of below formula

$V=\sum_{i=1}^{n}\frac{Coupon\ rate}{(1+Rate)^i}+\frac{Maturity\ value}{(1+rate)^n}$

The 3 key variable for straight fixed rate bond valuation are:

1. Interest rate .

Value of bond has inverse relation with interest rate , the value will increase with interest rate .

2. Maturity of bond:

the fixed bond have maturity dates, short-term or long-term.The value of bond depend on maturity period if other factor remain constant.

3. Coupon rate :

the fixed straight bond have fixed coupon rate.The value of bond depend on coupon if other factor remain constant.

Value have direct relation with coupon rate.