Bonds may expose an investor to one or more of the following risks: (1) interest-rate risk, (2) reinvestment risk, (3) call risk, (4) credit risk, (5) inflation risk, (6) exchange rate risk, (7) liquidity risk, (8) volatility risk, and (9) risk risk.
When pricing a bond, it is necessary to estimate the expected cash flows and determine the appropriate yield at which to discount the expected cash flows.
Example of Present Value of an Ordinary Annuity Using Annual Interest
The present value is the future value process in reverse. We have:
PV = [1/(1+r)^n]
If A = $100, r = 0.09, and n = 8, then: PV=A[1-(1/(1-r)^n] ; 100[1-1/(1.09)^8]
=$100[1-(1/(1.99256)/(0.09)]; $100[1-0.501867/0.09]; $100(5.534811); = $553.48.
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