Discounting and Bond Valuation

This chapter explores the valuation of bond, or specifically, the regular or common corporate bond. Asset valuation is the basic function of finance; regular corporate bond is the simplest asset. So regular bond valuation is often supposed to be a solved problem in finance. But this is not true. We discuss and find the benchmark for a right solution to this problem, that is, clean value should equal exactly to the bond face value when the frequency of interest payment is once a year and the coupon rate equals precisely to the discount rate. Apparently, no model in current mainstream finance can reach this level. We finally work out such a solution, i.e., the valuation models of bond in clean value and dirty value respectively factored in the frequency of interest payment and accrued interest.