Question

help needed:

How do we calculate bond yields and bond values?

Do we follow the general principal of assets being worth the present value of expected cash flows?

Bond yield is a special use of the internal rate of return. Discuss.

Answer 1

1-Bond yield is called the yield earned on bonds, it is the yield which is earned on bonds, Yield may be of many types (1)Yield to maturity (2) Yield to call (3) holding period yield (4) current yield

Generally YTM Is calculated using the trial error method by which future cash flow are discounted and sum of present value of future cash inflow would be equal to cash outflow and NPV would be zero. So bond yield is a rate at which sum of present value of future cash inflow would be equal to cash outflow.

Alternatively YTM = Interest+(redemption value-market value)/ n / (redemption value+ market value)/2

Value of bond is calculated by discounting the future cash inflow from bonds at a rate equal to YTM and then discounted cash inflows are summed up to find out the value of bond.

2- Yes we follow the same principle of discounting the future cash flow to find out the value of bond & assets being worth the present value of expected cash flows

3- Yes it is true that YTM is a special case of IRR because in IRR future cash flow are discounted and summed up and then cash outflows are deducted and a zero NPV is found and same is in the case of YTM where future cash flow are discounted and sum of present value of future cash inflow would be equal to cash outflow and NPV would be zero.