BOND PRICES
All investments, including bonds and shares, derive value from the cash flow they are expected to generate. Because the cash flows will be received over future periods, there is need to discount these future cash flows to derive a present value or price for the security. In general terms, the theoretical price of any security can be established as the present value of a future stream of cash flows, as described by the following formula:
BOND PRICING THEOREMS
Bond are generally issued with a fixed rate of interest known as the coupon rate. This is calculated on the face value of the bond and remains fixed till maturity. At the time of issue of the bond its coupon rate will generally be equal to the prevailing market interest rate.
The relation between bond prices and changes in market interest rates have been stated by Burton G.Malkiel in the form of five general principles. These are known as Bond pricing theorems.
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