Chapter 2. Pricing of Bonds. Time Value of Money (TVM). The price of any security equals the PV of the security’s expected cash flows. So, to price a bond we need to know: The size and timing of the bond’s expected cash flows.
Pricing of Bonds
n = number of periods
Pn = future value n periods from now (in dollars)
Po = original principal (in dollars)
r = interest rate per period (in decimal form)
Note: All inputs to the bond pricing formula are fixed except for y. As y changes so does P.
An investor would pay $252.12 today and receive $1,000 in 15 years.