Bond pricing

The title may change as the content is developed. The intent is to show why a bond's price changes inversely with yield. Hopefully, this can be further developed to extend into a graphical definition of duration. Perhaps this can tie-in to reorganize the definitions of duration as shown in Duration - Definitions Refined. Another page can be built from this material- use of PV to determine if an investment is worthwhile. --LadyGeek 03:10, 9 March 2010 (UTC)

Bond price, or the price of any financial instrument for that matter, is the sum of the present value of the cash flows, which is determined by:
 * 1) The present value of the (semiannual) coupon payments
 * 2) The present value of the par or maturity value

The interest rate, or discount rate, that the investor wants from investing in a bond is called the required yield.

Present Value
basic graph of PV

p. 22, properties of PV -graph showing that extension drops price

-graph showing interest increase drops price, interest decrease increases price

What is the better investment
Good material as a separate page on use of PV to determine if an investment is worthwhile. p. 28, (3-10) example of what is the most one would pay

p. 26 (3-6) example of which received interest rate is better

$140,000 over 3 years or $160,000 over 5 years, weighted costs can be considered like a center of mass in engineering.

Price/Yield Curve
Using the PV property #1, it can be seen that the price of a bond changes in the opposite direction of the yield. p. 53, Exhibit 5-1 in Excel, then add graph

Yield to Maturity
p. 74 p. 94 the yield curve

Duration
p. 187 (graph using center of mass concept for weighted average)