Determinants of the NPV of a Bond

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A company may, before issuing a bond, wonder which conditions this bond has to feature in order to be attractive for investors. In practice, this is done by comparing the "own bond" to be created to a "similar bond" that is traded in the market. The characteristics (price, redemption, and coupon) of this similar bond influence the yield to maturity of the similar bond, which is in turn used to discount the proceeds an investor may have from the own bond. By analyzing different situations, you can learn how different constellations of characteristics of the similar bond affect the net present value of the own bond.

Contributed by: Thomas Lindner (October 2011)
Open content licensed under CC BY-NC-SA



A companion Demonstration, 'Financial Engineering of a Bond' illustrates the practical process that is undertaken before issuing a bond in order to make it as attractive as other bonds in the market (i.e. the net present value of the bond calculated with the yield to maturity of a comparable bond is zero). This Demonstration, however, focusses on the general characteristics that drive the net present value of a bond.

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