R Tutorial: Bond valuation

Want to learn more? Take the full course at https://learn.datacamp.com/courses/bond-valuation-and-analysis-in-r at your own pace. More than a video, you'll learn hands-on coding & quickly apply skills to your daily work. --- In this course, our exercises will focus on a particular bond that pays a fixed coupon rate once a year and has a fixed maturity with no embedded options. As a matter of economics, the value of any asset is equal to the present value of its expected future cash flows. These cash flows are discounted at an appropriate risk-adjusted discount rate. This is reflected mathematically in the equation on the slide. Bonds are no different. The first step in calculating bond value is to layout the cash flows we are discounting. Prior to maturity, the bond investor receives coupon payments. At maturity, the investor receives the last coupon payment and the par value. So we can modify the equation from the last slide to account for how these cash flows are separated from a mechanical point of view. We will revisit the inputs to this formula in more detail later. For now, it's important to understand the major components included in this formula. So how do we run this analysis in R? In R, we can then create a cash flow vector "cf" by laying out the cash flows as-is and remembering that the last cash flow equals the par value plus the last coupon payment. To complete the bond valuation exercise, we have to be able to add additional variables to the cash flow vector. We do this by using the data.frame() command. Because each cash flow occurs at a particular time, the first variable we need to add is a time index. We label this variable "t." The time index is used as the number of periods - in our example years - that we will discount each of the bond's cash flows. Next, we need to calculate a present value factor to discount each bond's cash flow. The discount rate for bonds is called the bond's yield. We will discuss yields in more detail in Chap