1. What is Bond Pricing?

Bond pricing is the method of calculating the fair price of a bond based on its future cash flows discounted at the required rate of return. In the UK, this is particularly important for gilts and corporate bonds.

2. How Does the Calculator Work?

The calculator uses the bond pricing formula:

Where:

• \( CF \) — Cash flow (GBP)
• \( r \) — Discount rate (decimal)
• \( t \) — Time period (years)

Explanation: The formula discounts future cash flows back to present value using the discount rate.

3. Importance of Bond Pricing

Details: Accurate bond pricing is essential for investors to determine fair value, assess yield, and make informed investment decisions in the UK bond market.

4. Using the Calculator

Tips: Enter cash flow in GBP, discount rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between clean and dirty price?
A: Clean price excludes accrued interest, while dirty price includes it. This calculator gives the clean price.

Q2: How does yield affect bond price?
A: There's an inverse relationship - when yields rise, bond prices fall, and vice versa.

Q3: What's typical for UK gilt yields?
A: UK gilt yields vary but historically range between 1-5% depending on maturity and economic conditions.

Q4: How often do UK bonds pay coupons?
A: Most UK gilts pay semi-annual coupons, though some pay quarterly or annually.

Q5: What about zero-coupon bonds?
A: For zero-coupon bonds, there's only one cash flow at maturity.