1. Bond Prices and the Time Value of Money

a. calculate a bond’s price given a market discount rate;

What is the fundamental principle of valuation? The idea that the value of any financial asset equals the present value of its expected cash flows is the fundamental principle of valuation. This principal is applicable to bonds, stocks and other financial assets.

In regards to bond pricing, what is a premium and what is a discount? A bond is priced at a premium above par value when the coupon rate is greater than the market discount rate. It is priced at a discount below par value when the coupon rate is less than the market discount rate.

What is Yield-to-maturity? Yield-to-Maturity is the interest rate that will make the present value of the cash flows from a bond equal to its price.