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Bond pricing

Valuing a bond as the present value of its future coupon and principal payments, discounted at the market yield.

A bond's price is the sum of its future cash flows, the coupons and the final principal, each discounted back to today at the prevailing yield. When yields rise, prices fall, and the other way round.

Understanding this link between price and yield is the foundation of fixed income, and it underlies duration and interest rate risk.

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