BOND MATH: The Theory Behind the Formulas

CHAPTER 3

Prices and Yields on Coupon Bonds

This chapter is about prices and yields on coupon bonds. The vast majority of bonds pay coupon interest regularly to investors, mostly semiannually but sometimes quarterly or just once a year. Zero-coupon bonds like Treasury STRIPS might have an interesting history, but in the study of bond math, they really are just a convenient way to introduce terminology and basic calculations—yields to maturity, horizon yields, periodicity conversions, credit spreads, and default probabilities. With all due respect to Chapter 2, Chapter 3 is much more important.

There is a which-comes-first aspect to bond prices and yields: Do prices drive yields, or do yields drive prices? If we know an investor's required rate ...