How do you price a bond?
What the interviewer is testing
Present-value mechanics.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Discount each coupon and the final repayment of principal at the market yield for that maturity, and add them up. If the coupon is above the market yield, the bond trades above par (at a premium); if below, at a discount; if equal, at par.
The full answer
Price = Σ coupon ÷ (1 + y)^t + face value ÷ (1 + y)^n
Example
3-year bond, €100 face value, 6% annual coupon, market yield 5%.
| Year | Cash flow | Discount factor at 5% | PV |
|---|---|---|---|
| 1 | 6 | 0.9524 | 5.71 |
| 2 | 6 | 0.9070 | 5.44 |
| 3 | 106 | 0.8638 | 91.57 |
| Price | 102.72 |
Above par because the 6% coupon beats the 5% market yield.
In practice
- Prices are quoted clean (without accrued interest); buyers pay the dirty price (clean + accrued).
- Each cash flow can be discounted at its own zero-coupon rate (the spot curve), not one yield.
Mistakes to avoid
Forgetting the principal repayment at maturity.
Follow-ups they may ask
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