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Summarizing the main lessons

1. Summarizing the main lessons

You're almost at the end. You have learned a great deal about the fundamentals of bond valuation and analysis. Let's take a second to review.

2. Bond valuation

First, you learned how to value a bond. Many bonds are not traded and, even if they were traded, they do not trade frequently enough for us to be able to rely on the price of many bonds as an indicator of their value. So we have to resort to valuing bonds using fundamental valuation methods. In this course, we used a simple example of a bond so we can focus on the fundamental concepts of bond valuation. This is a bond that pays annual coupons at a fixed coupon rate with a fixed time to maturity and with no embedded options. Of course, you have to remember that bonds in the real world are heterogeneous. The same company can issue many bonds with different features. Therefore, going forward, to value a bond properly, you have to understand how each of those features affects the value of a bond.

3. Yield to maturity

The second thing you learned in this course is the bond's yield to maturity. The YTM can be thought of as the compensation for the risks that the bond investor faces when investing in that bond. You can find the YTM of a bond by looking at the YTM of comparable bonds. Alternatively, as you learned, you can also find the YTM implied by investors by solving for it using the ytm() function you created. You also learned that bond yields are comprised of a risk-free yield and a spread. The risk-free yield is the yield on a comparable US Treasury security. The spread reflects many risks, such as credit risk, inflation risk, call risk, and liquidity risk. Investors need to be compensated for each risk they are taking on when investing in a bond. The riskier the bond is for the investor, the higher the yield the investor would demand.

4. Let's practice!

You will now go through a series of exercises to solidify your knowledge of bond valuation and yield to maturity. You will be valuing a Aaa-rated bond with $100 par value, 3% coupon rate, and 8 years to maturity. You will have to find the yield on comparable Aaa-rated bonds and value the bond in a step-by-step fashion.