alue BondsРIdentify the size and timing of cash flows.?Discount at the correct discount rate.?If you know the price of a bond and the size and timing of cash flows, the yield to maturity is the discount rate.РYield to MaturityРDefinition: The yield to maturity (YTM) of a bond is the discount rate that makes the present value equal to the current bond priceРExample: Consider a bond that pays $300 at date 1 and date 2 and also repays $1,000 principal (face value) at date 2. The bond currently sells for $1,200. What is it’s YTM?Р?1,200 = 300/(1+r) + 1,300/(1+r)2? .1733 = r? So YTM is 17.33%РPure Discount BondsРInformation needed for valuing pure discount bonds:?Time to maturity (T) = Maturity date - today’s date?Face value (F)?Discount rate (r)РPresent value of a pure discount bond at time 0:
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