Chapter 7 - FI Pricing & Trading

Question 1

What is the formula for Present Value of a Bond?

Answer 1

P.V. = Coupon / (1 + Dscnt Rt)^1 +…+ (Coupon + Principle) / (1 + Dscnt Rt)^n

• Discount Rate = Yield
• Coupon div by 2 if semi-annual payments

Question 2

How is the discount rate / yield determined?

Answer 2

Equal to Gov of Canada bond with similar term + spread in basis pts that reflects credit risk, liquidity, etc.