OVERVIEW

Bond price calculations are a special combination of annuity certain and present value. We will use the concepts and calculations developed in previous chapters to show how to compute a bond price. You will not find this terribly difficult to understand and to do. Then why do we have a special chapter on bond price calculations? Here are three reasons:

1. Bonds are especially important in finance. Bond offerings each year far exceed stock offerings in value. Bond issuers include national, state, and local governments and their authorities and agencies, foreign governments and international governmental organizations, and both domestic and foreign corporations. Only corporations can issue stocks. Many bonds have wide, active trading markets, and their ownership includes many individuals, governments and their agencies, and businesses. United States Treasury bonds, in particular, offer high quality, a wide choice of maturity dates, and excellent trading markets. These features make bonds particularly attractive for many investors. Many investors have made bonds, especially United States Treasuries, the backbone of their investment portfolio.

2. Bonds offer a basis for pricing many other securities and many derivative instruments. These trade in some relation to certain bonds; we say they trade off these bonds. Such securities include many mortgage-backed securities. Other securities may actually have their interest rates determined by the rates paid on certain particular bonds or on indices based on certain categories of bonds. Many derivative securities have their rates or prices determined by the rates or prices of high-quality and widely traded bonds, such...