Financial Engineering of a Bond

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In business practice, the issuing price, redemption, and coupon of a newly issued bond are fixed with regard to a "similar bond". The aim of the issuing company is to make the newly issued bond equally attractive to investors as the "similar bond". Therefore, using the yield to maturity of the similar bond to discount the proceedings of the newly issued bond should result in a net present value of the newly issued bond of zero. You can use the coupon, issuing price, and redemption to adapt a newly issued bond in such a way that its net present value is zero for a given yield to maturity of a similar bond.

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



A companion Demonstration, "Determinants of the NPV of a Bond", illustrates the main characteristics of a to-be-issued bond and how these influence its net present value. As opposed to that, the Demonstration "Financial Engineering of a Bond" can be used to model the process that is followed before actually issuing a bond, i.e. the adjustment of the relevant factors such that the NPV of the to-be-issued bond is zero, given a certain yield to maturity of a similar bond.

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