Bond valuation

Bond valuation is the process of estimating the fair value of a bond. In the present-value approach, the value equals the sum of expected cash flows discounted at appropriate rates.

In practice the discount rate is often inferred by reference to similar, more liquid instruments. Several related yield measures can then be computed for a given price (see Yield and price relationships). If the market price of a bond is below par value, it trades at a discount; if it is above par, it trades at a premium. Methods used on this page include relative pricing and arbitrage-free pricing.

If a bond has embedded options, valuation combines option pricing with discounting. Depending on the option type, the option value is added to or subtracted from the value of the option-free bond to obtain the total price. See embedded options.

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