CFA Level 1 fixed-income valuation building blocks
A bond price is the present value of its coupon payments and principal. Draw the cash-flow timeline, match the yield convention to the payment frequency, discount every payment, and distinguish clean price from the settlement amount.
The key ideas, at a glance
Cash-flow timeline
Read the visual, then follow the worked example below. Use the stated case assumptions.
Illustrative worked case
per 100 par
Year 1
5
per 100 par
PV today 4.81
Year 2
105
per 100 par
PV today 97.08
The final payment includes the 5 coupon plus 100 principal. At 4% annual yield, the two present values sum to 101.89; accrued interest is zero.
| Concept | Rule or decision | Common mistake |
|---|---|---|
| Cash-flow timeline | List each coupon and the principal repayment on its payment date. | The final date includes both coupon and principal. |
| Matching periods | For a nominal annual yield with m compounding periods, use yield / m and years × m. | Do not divide an effective annual yield by m; convert it first. |
| Present value | Price = sum of each cash flow divided by (1 + periodic yield) raised to its period. | Compounding cash flows forward produces a future value, not today’s price. |
| Price convention | Full price = clean price + accrued interest. | Use the stated day-count convention and settlement date for accrued interest. |
01Cash-flow timeline
List each coupon and the principal repayment on its payment date.
Watch for: The final date includes both coupon and principal.
02Matching periods
For a nominal annual yield with m compounding periods, use yield / m and years × m.
Watch for: Do not divide an effective annual yield by m; convert it first.
03Present value
Price = sum of each cash flow divided by (1 + periodic yield) raised to its period.
Watch for: Compounding cash flows forward produces a future value, not today’s price.
04Price convention
Full price = clean price + accrued interest.
Watch for: Use the stated day-count convention and settlement date for accrued interest.
Selected 2026 study concepts. Match your preparation to your registered exam-year curriculum. These notes are not complete curriculum coverage.
Free PDF by email
CFA Level I: 20 practice MCQs
Enter your email on the PDF page to receive the printable pack, with answers and explanations. Selected level/pathway questions; see the topic mix before requesting.
No account or payment required for the PDFs. Includes the monthly newsletter; unsubscribe anytime.
Put the method to work
One worked example, from facts to answer
Given
A two-year bond pays 5 annually per 100 of par. Yield is 4% with annual compounding; valuation is on a coupon date.
Method
Price = 5 / 1.04 + 105 / 1.04² = 101.89, rounded.
Answer and interpretation
The bond trades above par because its 5% coupon exceeds the 4% required yield. Accrued interest is zero on this coupon-date assumption.
Original independent teaching example. Assumptions are stated above; this is not an official exam question or scoring key.
Apply the framework, step by step
Price a fixed-cash-flow bond and reconcile payment timing, yield conventions and clean/full price. The wider Fixed Income lesson covers yield interpretation, duration and credit risk.
Before you start: Present value, coupon rate versus required yield, par value and periodic compounding.
METHOD 01
Cash-flow timeline
List each coupon and the principal repayment on its payment date.
Draw a timeline before entering calculator values. The coupon is based on par and the coupon convention; the discount rate is the required yield for the stated compounding convention. A plain bond makes several coupon payments and repays principal at maturity. The maturity-date cash flow therefore includes the final coupon as well as par. Price each promised payment at its own date.
Avoid this mistake: The final date includes both coupon and principal.
METHOD 02
Matching periods
For a nominal annual yield with m compounding periods, use yield / m and years × m.
A nominal annual yield of 6% with semiannual compounding means a 3% half-year rate, with two payment periods per year. An effective annual rate requires a different conversion: the matching half-year rate is (1 + effective annual rate)^(1/2) - 1. Check frequency for coupons, discounting and the period count separately; the same printed percentage can imply a different periodic rate.
Avoid this mistake: Do not divide an effective annual yield by m; convert it first.
METHOD 03
Present value
Price = sum of each cash flow divided by (1 + periodic yield) raised to its period.
Discount coupons and principal, then add their present values. On a coupon date with matching payment conventions, a plain fixed-rate bond is at par when coupon rate equals required yield, above par when coupon rate is higher, and below par when coupon rate is lower. This comparison holds promised cash flows fixed; embedded options or a changing credit outlook require additional analysis.
Avoid this mistake: Compounding cash flows forward produces a future value, not today’s price.
METHOD 04
Price convention
Full price = clean price + accrued interest.
Between coupon dates, separate the quoted clean price from the full price paid at settlement. Full price includes accrued interest under the specified day-count convention. Accrued interest is not another full coupon in the valuation. A zero-coupon bond has no periodic coupon accrual in this simple setup. Always state whether a calculation returns clean price, full price or a coupon-date price.
Avoid this mistake: Use the stated day-count convention and settlement date for accrued interest.
Apply it to a different case
- New facts
- A three-year zero-coupon bond repays 1,000. Required yield is 6% with annual compounding.
- Working
- PV = 1,000 / 1.06³ = approximately 839.62. There are no interim coupons to add.
- Conclusion
- The price is 839.62 under the stated yield. A higher required yield would lower the price of the same maturity payment.
Original teaching case under the stated assumptions, rather than an official exam question.
Questions about this method
- Why is the coupon rate not the discount rate?
- The coupon rate determines contractual interest payments from par. The required yield is the market return used to value those payments. They can differ, which is why a bond can trade above or below par.
- When can I divide an annual yield by two?
- When it is a nominal annual yield stated with semiannual compounding. For an effective annual yield, derive the half-year rate using (1 + annual rate)^(1/2) - 1.
- What is the difference between clean and full price?
- Full price is clean price plus accrued interest. Use the settlement date and stated day-count convention. On a coupon date, accrued interest is zero under the simple timing convention used in these examples.
Sources and curriculum scope
Official outlines establish curriculum scope. The explanations and worked examples are independent teaching material; the sources do not verify or endorse them.
- 2026 CFA Level 1 curriculum outline
- Official Level 1 format and curriculum
- 2026 bond valuation: prices and yields
- 2027 CFA Level 1 curriculum outline
MiloPrep is an independent study resource, not affiliated with or endorsed by CFA Institute. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.