Valuationƒ 113

Yield-to-maturity (y)

/ internal rate of return (IRR):

(constant) discount rate that makes the discounted value of the promised future CFs equal to the market price of the bond (... forecast of the average annual rate of return, under the assumption that the coupon can be reinvested at this rate)

ƒ

Zero rate (z

) t

/ spot rate: internal rate of return of a zero-

coupon bond

1

1

1

1

0 1

)

(^1) (
)
(^1) (
)
(^1) (
)
(^1) (
z
y
year
per
CFs
of
number
and
T
if
z
y
c
if
z
FV
c z
y
FV
y
c
PV
t
T
t
T t
t
t
T
T t
t

⇒

=

⇒

• 
  
  
  
  • 
    
    
    
    • = + + + =
    
    
    
    
  
  
  
  

∑

∑

=

=

Multi-period deterministic cash flows: FI securities - Valuation