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Bond Pricing Formulas

The main outputs for a bond are the price (clean and dirty) and the yield. The "_Price" functions determine bond price as a function of yield to maturity, while the "_Yield" functions determine yield to maturity as a function of bond price. Although Sovereign bond's are quoted in either price or yield, both a yield and a price function exist for each Sovereign Government Bond.

 

Participants in all markets use a conventional pricing formula for calculating prices from redemption yields, or visa versa. However, despite some recent efforts to standardize pricing methods (especially in the EU countries), the formula is not the same across all 20 markets because of a variety of different bond characteristics and special pricing approaches. As a starting point, this development uses the yield formulas promoted by the International Securities Market Association (ISMA) as the generic pricing engine, and then considers the changes that must be made to those formulas to account for the special pricing conventions within each market.

 

The ISMA formula is derived using compound interest. Money Market formulas, on the other hand, use simple interest. Except for the generic bond functions (which can use either compound or simple interest in every period) and certain Sovereign bond functions (e.g. US and German bonds, which use simple interest in the final period), all functions in the Bond Pricing use compound interest in every period. Please refer to Sovereign Government Bond pricing conventions.

 

In This Section

Compound Interest (ISMA)

Simple Interest (Money Market) Formula

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