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  3. Bond Valuation and Analysis in Python
  • 1

    Time Value of Money

    Free

    In this chapter, you’ll cover simple and compound interest, compounding frequencies, future value as well as commonly used financial functions in the NumPy-financial package.

  • 2

    Bond Prices & Yields

    Let’s get fiscal. You’ll discover how to find the price of both zero-coupon and coupon-paying bonds, as well as examining the relationship between bond prices and bond yields.

  • 3

    Duration

    Now it’s time for you to explore interest rate risk via the concept of duration, the factors affecting duration, and how to use duration to predict the price changes of a bond or hedge bond portfolios.

  • 4

    Convexity

    In the final chapter, you’ll be introduced to convexity. You’ll see how it helps address the weaknesses inherent in duration, examine the factors affecting convexity, and use both duration and convexity together to better predict bond prices.

Initializing

Exercise

Pricing zero coupon bonds

You have seen that the price of a zero coupon bond is simply the PV of a single cash-flow in the future. How much that single cash-flow is worth today will depend on how far it is into the future and what interest rate (yield) you discount it at. We will investigate this now.

To do this, you are going to price a zero coupon bond with a three year maturity and yield of 5% per year. Then you will change the maturity and yield and see how these factors affect the price.

In this exercise, you are going to work directly with the compound interest formula instead of using the npf.pv() function.

Recall that our PV formula is \(PV = \frac{FV}{(1 + r)^n}\)

Instructions 1/3

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  • Find the price of a zero coupon bond with a three year maturity, 5% yield, and USD 100 face value and print the result.