Identifier: C2T2L1 | Revision: 2026-10-26

Decision and objectives

Decide how much to pay for specified debt payments rather than starting with a desired return and treating it as guaranteed. Discounting translates each future cash receipt into a present amount. Begin with the exact payment schedule reconstructed in C2T1L2; a valuation cannot repair a missing call clause or incorrect coupon.

Objectives: Value dated cash payments; Reconcile price per 100 and nominal cash; Identify assumptions behind a model price.

Prerequisites: C2T1L5.

Mechanics

The owner receives contractual cash from the issuer on the stated dates. A seller in the secondary market transfers the remaining rights in exchange for settlement cash. The model values those remaining rights, not past coupons. At a coupon date just after payment, accrual is zero; between dates, remaining fractional periods and settlement conventions matter. Use a stated coupon-date valuation first to learn the mechanism without confusing accrued interest with discounting.

Price and return drivers

For annual payments and annual effective yield y, present value of payment CF at year t is CF / (1 + y)^t. Price is the sum of these present values. Discounting asks: what amount invested today at y would grow to this payment? Higher required yield reduces present value because less initial money is needed to reach the same future sum.

A single yield discounts every payment with one rate. That is a useful quotation device, not a claim that every maturity has the same market rate. A spot curve can discount each maturity separately. Semiannual nominal yield needs y/2 and a count of half-year periods; mixing annual cash timing with half-year rates misprices the bond.

Worked case

Hypothetical TRY 100 face bond, 10% annual coupon, two annual payments remaining, redemption at par, valuation immediately after a coupon. Payments are TRY 10 in year one and TRY 110 in year two. Use annual effective required yield 12%; no default, option, fees or tax. Year-one present value = 10 / 1.12 = 8.928571. Year-two present value = 110 / 1.12² = 87.691327. Total model price = 96.619898 per 100 face. For TRY 200,000 face, gross purchase cash at that price is TRY 193,239.80.

The below-par price compensates for a coupon below the required yield. It does not mean the issuer repays only 96.62; promised redemption remains 100. Add a hypothetical TRY 200 fee and initial cash becomes TRY 193,439.80. Investor net yield would be slightly below 12% because the fee increases money invested without increasing issuer cash.

Adverse case

If required yield immediately rises to 15% with unchanged payments, model price becomes 10 / 1.15 + 110 / 1.15² = 91.871456. Price loss is 4.748442 per 100, or TRY 9,496.88 on the stated face amount, before sale costs. If the issuer's expected payments deteriorate, merely changing the discount rate may not adequately describe default risk: payment timing and recovery can change too.

Practical use

Compare the model value with a timestamped executable bid or ask for the required size. A model price is neither a guaranteed trade nor a dealer commitment. At non-coupon settlement, use the issue's fractional-period method and distinguish dirty value from clean quote. Include bid-ask spread, commission, custody and investor tax in the decision ledger. This example isolates gross cash-flow value; C2T7 completes net comparisons.

Decision boundaries

Use this method for fixed, known cash schedules under stated discount assumptions. Do not insert perpetual, inflation-indexed or callable payments into a fixed two-year formula without adapting the schedule. A price that looks cheap against an inappropriate yield is not evidence of mispricing. Decline valuation precision when the payment terms or quote basis cannot be verified.

Practice and references

Exercise: hypothetical annual bond pays 8 in one year and 108 in two years per 100 face; annual effective yield 10%; coupon-date settlement, no costs, tax or options. Answer: 8 / 1.10 = 7.272727; 108 / 1.10² = 89.256198; price = 96.528926 per 100. For TRY 50,000 nominal, gross cash is TRY 48,264.46.

Takeaway: value each promised payment on its own date, then sum.

Reference guide: domestic-government-bond, simplified-bond-price, Present value, Yield to maturity.

Next: C2T2L2. Topic test: C2T2.

Primary sources (checked 2026-10-26; changing terms require a publication recheck): Borsa Istanbul Debt Securities Market products — Public Debt Instruments; Private Sector Debt Instruments; Lease Certificates; Eurobonds; SEC Investor Bulletin: What Are Corporate Bonds? — Interest rate risk, credit risk, call risk and seniority.

Shared reference guide