Question

Discuss valuing bonds and how interest rates affect their value. Also consider the importance of the yield-to-maturity (YTM).

Answer 1

Valuation of bond:

Main theme of bond valuation is that bond's value should be equal to the present value of its expected cash flows.

The valuation can be said the following three steps:

1. Find the expected cash flows.
2. Identify the appropriate interest rate that should use to discount the cash flows.
3. Determine the present value of the expected cash flows as per step one with the interest rate Identified in step two.

For a risk-free bond the minimum interest rate that an investor should agree with the yield.

Importance of YTM:

Yield to maturity is nothing but the return expected on a bond if the bond is held until its maturity.
With the YTM, can Estimate whether or not buying a bond.

Once the YTM of a bond is determined , Investor can consider buying by comparing the YTM with the required yield.

I hope this will help you.