Prices of Coupon-Bearing Bonds

An n-period coupon-bearing bond pays periodic coupons and par at maturity. The pattern of cash flows is shown in Table 7.6.

A coupon-bearing bond is essentially a portfolio of zero-coupon bonds or strips. Consider one-period, two-period, and n-period coupon-bearing bonds. The price of each bond is the present value of each of the coupons (c) and the par value.

One-period bond

Table 7.6 Cash flows for coupon-bearing bond

To illustrate, suppose the one-period spot interest rate (R_0,1) is 4 percent, and a bond has a coupon of $6 and par value of $100:

Two-period bond

To illustrate, suppose the one-period spot interest rate (R_0,1) is 4 percent, the two-period spot interest rate (R_0,2) is 8 percent, and a bond has a coupon of $6 and par value of $100: