Valuing an option-free bond, Financial Management

To value an option-free bond, we must determine the on-the-run yield curve for the particular issuer whose bond we have to value. This on-the-run yield curve used for valuation process is considered as the benchmark interest rates.

Let us consider the following on-the-run issue. The illustration deals with an option-free bond with four years remaining to maturity and a coupon rate of 6.5%.


Yield to Maturity (%)

Market Price (in $)

 1 year



2 years



3 years



4 years



Each bond is trading at par value i.e., at $100, so the coupon rate is equal to the yield to maturity.

Using the bootstrapping method, the spot rates are determined as follows:


Spot Rates (%)









Using spot rates, we can calculate the present value of the cash flows.

          2136_valuing opton free bond.png   = $105.374

Posted Date: 9/10/2012 6:29:36 AM | Location : United States

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