ABSTRACT
As with other financial investments, the fair prices of bonds are based on the present value of expected future cash flows.The general formula for estimating the fair price of a bond is:
P C/(1r) C/(1r)2 C/(1r)3 . . . C/(1r)n B/(1r)n (1)
or P C n
where P is the fair price of the bond (its dirty price, which includes accrued interest), C is the regular coupon payment each period, B is the money value to be paid to the bondholder at redemption, r is the rate of discount per period, and n is the number of periods remaining to redemption.
