Advanced Bond Concepts: The floating coupon rate usually consists of two parts:. Each bond market has its own convention:.
Zero coupon bond valuation where
A zero coupon bond, sometimes referred to as a pure discount bond or simply discount bond, is a bond that does not pay coupon payments and instead pays one lump sum at maturity. Related Terms Bond Discount Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity.
It is needed because the price is not a linear function of the discount rate, but rather a convex function of the discount rate. Clean prices are generally more stable over time than dirty prices.
In such cases, stochastic calculus is employed.
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Thanks for letting us know. We can combine the bond price formula and the annuity model to arrive at the following formula, which requires us to also include the present value of the par value reached at maturity:.