Bond Pricing Pedagogy and One-Step Bond Pricing

Abstract

Pricing bonds is generally one of the earliest applications of time value of money in a finance curriculum. A bond price incorporates the use of an annuity and an individual discounted cash flow while also being a “fundamental” financial security. This paper works through the pedagogy of bond pricing and extends the traditional bond pricing formula in a manner that can be used to more clearly demonstrate the relationship between the coupon rate and the yield to maturity. Further, when implemented as a test question or within an assignment, this method can challenge students to think more critically about bond pricing and the time value of money.

Keywords: bond pricing, pedagogy, annuity

JEL Classification: G00, G12, G30