COMPREHENSIVE GUIDE TO BOND VALUATION
Methods, Formulas & Worked Examples
TABLE OF CONTENTS
1. Bond Basics & Key Concepts
2. Method 1: Zero Growth (Zero-Coupon Bonds)
3. Method 2: Constant Growth (Perpetual Bonds)
4. Method 3: Supernormal Growth (Variable Rate Bonds)
5. Method 4: Standard Coupon Bonds (Your Cameroon Example)
6. Summary Comparison Table
7. Practice Problems
1. BOND BASICS & KEY CONCEPTS
What is a Bond?
A bond is a debt instrument where an investor loans money to a borrower (government or corporation)
for a defined period at a fixed or variable interest rate.
Key Terms
Term Symbol Meaning
Face Value / Par Value FV Amount repaid at maturity
Coupon Rate c% Annual interest rate on face value
Coupon Payment C Actual cash payment per period (C =
FV × c%)
Yield to Maturity (YTM) r/y Market-required return / discount rate
Time to Maturity n Number of periods until repayment
Bond Price P Present value of all future cash flows
Core Principle
The value of any bond = Present Value of all future cash flows
𝑃 = 𝑃 𝑉 (𝑒𝑥𝑡𝑎𝑙𝑙𝑐𝑜𝑢𝑝𝑜𝑛𝑠) + 𝑃 𝑉 (𝑒𝑥𝑡𝑓𝑎𝑐𝑒𝑣𝑎𝑙𝑢𝑒𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡)
2. METHOD 1: ZERO GROWTH (ZERO-COUPON BONDS)
Concept
Zero-coupon bonds pay NO periodic interest. They are sold at a deep discount and pay only the face
value at maturity.
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Formula
𝑃 =
racFV(1 + r)𝑛
Where:
• FV = Face value (future payment)
• r = Yield/discount rate per period
• n = Number of periods to maturity
Example 2.1: Cameroon Treasury Zero-Coupon Bond
Scenario: BEAC issues a 10-year zero-coupon bond with a face value of 1,000,000 FCFA. The market
yield for similar bonds is 6% per annum.
Calculate the issue price:
𝑃 =
rac1,000,000(1 + 0.06)10
𝑃 =
rac1,000,0001.7908
𝑃 = 558, 395𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Interpretation:
• Investor pays 558,395 FCFA today
• Receives 1,000,000 FCFA in 10 years
• Implicit return = 6% per year (the yield)
• Discount = 441,605 FCFA (44.2% below face value)
Example 2.2: Finding Yield Given Price
Scenario: A 5-year zero-coupon bond with FV = 500,000 FCFA is trading at 350,000 FCFA. What is
the yield?
350, 000 =
rac500,000(1 + r)5
(1 + 𝑟)5 =
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rac500,000350,000 = 1.4286
1 + 𝑟 = (1.4286)1/5 = 1.0735
𝑟 = 7.35%
3. METHOD 2: CONSTANT GROWTH (PERPETUAL BONDS / CON-
SOLS)
Concept
Perpetual bonds (or “consols”) pay a fixed coupon FOREVER — they never mature. These are rare but
exist in some markets (e.g., UK government consols).
Formula
Since coupons continue indefinitely, we use the perpetuity formula:
𝑃 =
racCr
Where:
• C = Constant coupon payment (per period)
• r = Yield/discount rate (must be > 0)
Example 3.1: Perpetual Bond Valuation
Scenario: The Douala Stock Exchange lists a perpetual bond issued by a Cameroonian utility company.
It pays 50,000 FCFA annually forever. The market yield for similar-risk bonds is 8%.
Calculate the bond value:
𝑃 =
rac50,0000.08
𝑃 = 625, 000𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Interpretation:
• Investor pays 625,000 FCFA today
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• Receives 50,000 FCFA every year forever
• Return = 8% per year (50,000 / 625,000 = 0.08)
Example 3.2: Finding Yield on a Perpetual Bond
Scenario: The same perpetual bond is trading at 700,000 FCFA. What is the implied yield?
𝑟=
racCP =
rac50,000700,000 = 7.14%
Key Insight: When price rises, yield falls (inverse relationship).
Important Note on “Constant Growth” in Bonds
In stock valuation, the Gordon Growth Model uses constant growth:
𝑃 =
racD1 𝑟 − 𝑔
For bonds, “constant growth” typically refers to:
1. Perpetual bonds (fixed coupon, no growth in payment)
2. Floating-rate bonds where coupon adjusts with a reference rate
Bonds with truly growing coupons are rare and fall under “supernormal growth” or structured products.
4. METHOD 3: SUPERNORMAL GROWTH (VARIABLE / STEPPED
COUPON BONDS)
Concept
Some bonds have coupon rates that change over time — either stepping up, stepping down, or tied to an
index. These require period-by-period discounting.
General Formula
𝑛
𝑃 =∑
𝑡=1
racC𝑡 (1 + 𝑟)𝑡 +
racFV(1 + r)𝑛
Where C_t = coupon in period t (which varies)
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Example 4.1: Stepped-Coupon Bond
Scenario: A Cameroonian infrastructure bond has the following structure:
• Years 1-3: 6% coupon
• Years 4-6: 8% coupon
• Years 7-10: 10% coupon
• Face value: 1,000,000 FCFA
• Yield: 7% per annum
Calculate the bond value:
Period Coupon (FCFA) PV Factor @ 7% Present Value
1 60,000 1/(1.07)^1 = 0.9346 56,076
2 60,000 1/(1.07)^2 = 0.8734 52,404
3 60,000 1/(1.07)^3 = 0.8163 48,978
4 80,000 1/(1.07)^4 = 0.7629 61,032
5 80,000 1/(1.07)^5 = 0.7130 57,040
6 80,000 1/(1.07)^6 = 0.6663 53,304
7 100,000 1/(1.07)^7 = 0.6227 62,270
8 100,000 1/(1.07)^8 = 0.5820 58,200
9 100,000 1/(1.07)^9 = 0.5439 54,390
10 100,000 1/(1.07)^10 = 0.5083 50,830
10 (FV) 1,000,000 0.5083 508,300
Total Bond Value = 1,122,824 FCFA
Interpretation:
• The bond trades at a premium (1,122,824 > 1,000,000)
• Early low coupons are offset by higher later coupons
• The average coupon (8.2%) exceeds the yield (7%)
Example 4.2: Inflation-Indexed Bond (Real-world Application)
Scenario: A BEAC inflation-linked bond pays:
• Base coupon: 4% of face value
• Inflation adjustment: coupon grows at 3% per year
• Face value: 1,000,000 FCFA
• Real yield: 5%
• Term: 5 years
Year Coupon Growth Coupon (FCFA) PV Factor @ 5% Present Value
1 40,000 × 1.03 41,200 0.9524 39,239
2 40,000 × (1.03)^2 42,436 0.9070 38,530
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Table 3 – continued
Year Coupon Growth Coupon (FCFA) PV Factor @ 5% Present Value
3 40,000 × (1.03)^3 43,709 0.8638 37,760
4 40,000 × (1.03)^4 45,020 0.8227 37,013
5 40,000 × (1.03)^5 46,371 0.7835 36,329
5 (FV) 1,000,000 1,000,000 0.7835 783,526
Total Bond Value = 972,397 FCFA
5. METHOD 4: STANDARD COUPON BONDS (YOUR CAMEROON EX-
AMPLE)
Concept
This is the most common bond type — pays fixed coupons periodically and face value at maturity.
Formula
𝑃 = 𝐶𝑖𝑚𝑒𝑠 [
rac1 - (1 + r)−𝑛 𝑟𝑖𝑔ℎ𝑡]+
racFV(1 + r)𝑛
Or equivalently:
𝑃 = 𝐶𝑖𝑚𝑒𝑠𝑃 𝑉 𝐼𝐹 𝐴(𝑟, 𝑛) + 𝐹 𝑉 𝑖𝑚𝑒𝑠𝑃 𝑉 𝐼𝐹 (𝑟, 𝑛)
Where:
• PVIFA = Present Value Interest Factor of an Annuity
• PVIF = Present Value Interest Factor (single sum)
Your Original Example (Revisited with Full Detail)
Scenario: Mr. Wetoh is considering Cameroon Treasury Bonds with:
• Face Value (FV) = 1,000 FCFA
• Coupon Rate = 10% per year
• Annual Coupon (C) = 1,000 × 10% = 100 FCFA
• Yield to Maturity (r) = 5% per year
• Time to Maturity (n) = 12 years
Step-by-Step Calculation:
Step 1: Calculate PV of Coupons (Annuity)
𝑃 𝑉𝑐𝑜𝑢𝑝𝑜𝑛𝑠 = 100𝑖𝑚𝑒𝑠
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rac1 - (1.05)−12 0.05
First, calculate (1.05)^12:
(1.05)12 = 1.795856
Then (1.05)^(-12):
(1.05)−12 =
rac11.795856 = 0.556837
Now the annuity factor:
rac1 - 0.5568370.05 =
rac0.4431630.05 = 8.8633
𝑃 𝑉𝑐𝑜𝑢𝑝𝑜𝑛𝑠 = 100𝑖𝑚𝑒𝑠8.8633 = 886.33𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Step 2: Calculate PV of Face Value (Single Sum)
𝑃 𝑉𝐹 𝑉 =
rac1,000(1.05)12 =
rac1,0001.795856 = 556.84 ext FCFA
Step 3: Add Both Components
𝑃 = 886.33 + 556.84 = 1, 443.17𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Verification Using Calculator/Excel:
Excel Formula: =PV(5%, 12, 100, 1000)
Result: -1,443.17 (negative = cash outflow to buy)
Example 5.1: Discount Bond (YTM > Coupon Rate)
Scenario: Same bond, but market yield rises to 12%.
𝑃 = 100𝑖𝑚𝑒𝑠
rac1 - (1.12)−12 0.12+
rac1,000(1.12)12
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𝑃 = 100𝑖𝑚𝑒𝑠6.1944+
rac1,0003.8960
𝑃 = 619.44 + 256.68 = 876.12𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Interpretation:
• Bond trades at discount (876.12 < 1,000)
• Coupon (10%) < Yield (12%), so price must fall
Example 5.2: Premium Bond (YTM < Coupon Rate)
Scenario: Same bond, but market yield falls to 8%.
𝑃 = 100𝑖𝑚𝑒𝑠
rac1 - (1.08)−12 0.08+
rac1,000(1.08)12
𝑃 = 100𝑖𝑚𝑒𝑠7.5361+
rac1,0002.5182
𝑃 = 753.61 + 397.11 = 1, 150.72𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Interpretation:
• Bond trades at premium (1,150.72 > 1,000)
• Coupon (10%) > Yield (8%), so price rises
Example 5.3: Par Bond (YTM = Coupon Rate)
Scenario: Same bond, market yield equals coupon at 10%.
𝑃 = 100𝑖𝑚𝑒𝑠
rac1 - (1.10)−12 0.10+
rac1,000(1.10)12
𝑃 = 100𝑖𝑚𝑒𝑠6.8137+
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rac1,0003.1384
𝑃 = 681.37 + 318.63 = 1, 000.00𝑒𝑥𝑡𝐹 𝐶𝐹 𝐴
Interpretation:
• Bond trades at par (exactly 1,000)
• Coupon = Yield, so price = Face Value
6. SUMMARY COMPARISON TABLE
Bond Type Cash Flow Pattern Formula When to Use
Zero-Coupon Single payment at maturity P = FV / Treasury bills, discount
(1+r)^n bonds
Perpetual Fixed coupon forever P=C/r Consols, preferred stock
(Constant)
Stepped/Variable Changing coupons over time P = Σ[C_t / Structured bonds, callable
(1+r)^t] + FV/ bonds
(1+r)^n
Standard Coupon Fixed coupons + FV at maturity P = C × PVIFA Most corporate/
+ FV × PVIF government bonds
Price-Yield Relationship
Relationship Coupon vs Yield Bond Price vs Face Value
Premium Coupon > Yield Price > Face Value
Par Coupon = Yield Price = Face Value
Discount Coupon < Yield Price < Face Value
7. PRACTICE PROBLEMS
Problem 1: Zero-Coupon Bond
A BEAC 5-year zero-coupon bond with FV = 2,000,000 FCFA yields 7%. What is the price?
Answer: P = 2,000,000 / (1.07)^5 = 1,425,972 FCFA
Problem 2: Perpetual Bond
A Douala Stock Exchange perpetual bond pays 75,000 FCFA annually. If required yield is 6%, what is
the price? If the price rises to 1,500,000 FCFA, what is the new yield?
Answer: P = 75,000 / 0.06 = 1,250,000 FCFA; New yield = 75,000 / 1,500,000 = 5%
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Problem 3: Stepped Coupon
A 6-year bond pays: Year 1-2: 5%, Year 3-4: 7%, Year 5-6: 9%. FV = 500,000 FCFA. Yield = 6%.
Calculate price.
Answer: P = 25,000/1.06 + 25,000/1.06^2 + 35,000/1.06^3 + 35,000/1.06^4 + 45,000/1.06^5 +
45,000/1.06^6 + 500,000/1.06^6 = 510,847 FCFA
Problem 4: Standard Coupon (Your Style)
A bond has FV = 5,000,000 FCFA, coupon 8%, yield 10%, 15 years to maturity. Calculate price.
Answer: P = 400,000 × 7.6061 + 5,000,000 × 0.2394 = 3,042,440 + 1,197,000 = 4,239,440 FCFA
(Discount)
8. SEMI-ANNUAL COUPONS (BONUS)
Most bonds pay coupons semi-annually. Adjust:
• Divide annual coupon by 2
• Divide annual yield by 2
• Multiply years by 2
Example: Semi-Annual Version of Your Bond
• FV = 1,000 FCFA
• Annual coupon = 10% → Semi-annual = 5% of 1,000 = 50 FCFA
• Annual yield = 5% → Semi-annual = 2.5%
• Years = 12 → Periods = 24
𝑃 = 50𝑖𝑚𝑒𝑠
rac1 - (1.025)−24 0.025+
rac1,000(1.025)24
𝑃 = 50𝑖𝑚𝑒𝑠18.3890+
rac1,0001.8087 = 919.45 + 552.88 = 1,472.33 ext FCFA
Note: Semi-annual compounding gives slightly higher value (1,472.33 vs 1,443.17) due to more frequent
compounding.
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KEY TAKEAWAYS
1. Bond value = PV of all future cash flows
2. Price and yield are INVERSELY related
3. When coupon > yield → Premium bond
4. When coupon < yield → Discount bond
5. When coupon = yield → Par bond
6. Zero-coupon bonds = deep discount, single payment
7. Perpetual bonds = coupon / yield (no maturity)
8. Variable coupons = discount each period separately
Prepared for Mr. Wetoh’s Investment Decision Based on Cameroon/BEAC Treasury Bond Market
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