Step$1$: Project cashflows associated with a bond. This usually

includes periodic coupon payments and a principle payment

equal to the face value at maturity.

Step$2$: Yield to maturity is used to discount these cashflows

to year $0$ as it is the rate of return investors earn by holding

this bond.

Summary Where to go next? Final remarks

Excel problem

Note this process applies to bonds traded at a discount, par

and a premium.

To verify the components of yield to maturity, the same bond

will be valued at year $0$ and $1.$

Summary Where to go next? Final remarks

Excel problem

Specific attention should be paid to the difference in

cashflows. $.$

Take a $15$ year bond with $7\%$ coupon rate and $1000$$ face

value as an example. When valuing at year $0,$ the bond has $16$

cashflows, i$.$e$.15$ coupon payments of $70$$ at the end of each

year for $15$ years and one principle payment of $1000$$ at

maturity. Specifically, the last coupon payment and principle

payment will be discounted for $15$ years. When valuing at year

$1,$ the bond has $15$ cashflows, i$.$e$.14$ coupon payments and

one principle payment of $1000$$ at maturity. Specifically, the

last coupon payment and principle payment will be discounted

for $14$ years.

Summary Where to go next? Final remarks

Excel problem

How can I memorize all these steps?

You don$$t need to$.$

Bond is a financial product! Ask yourself two questions: $1)$

what cash flows am I entitled to if I buy this bond? $2)$ at

which time spot, am I valuing this bond? How many cash

flows remaining? How many years should I discount those

cash flows?