FM: A bond price check begins with the cash-flow equation
A bond’s coupon rate determines coupon cash flows, while the yield discounts them. Confusing these two rates hides whether the bond trades above or below redemption value. Include the redemption payment at the same time as the final coupon.
Worked example or practice scenario
A two-year bond pays annual coupons of 40 and redeems for 1,000. At yield 5%, price is 40/1.05 + 1,040/(1.05)² ≈ 981.41. Coupon rate 4% is below yield 5%, so a below-par price is a useful reasonableness check.
Try this next
Reprice at 3% yield before calculating the exact number. Predict the direction first. Then separate present value of coupons and redemption to locate a missing final payment or a period mismatch.
Reading sources
ActNet editorial guide · October 1, 2026 · Original illustrative examples.
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