Definition of 'Lehman Formula'
The Lehman Formula is based on the idea that the value of a bond is equal to the present value of its future cash flows. The present value of a cash flow is the amount of money that would be needed today to produce the same amount of money in the future, given a certain interest rate.
To calculate the value of a bond using the Lehman Formula, you need to know the following information:
* The bond's coupon rate
* The bond's maturity date
* The current interest rate
The coupon rate is the interest that the bond pays each year. The maturity date is the date on which the bond matures and the principal is repaid. The current interest rate is the interest rate that is available on similar bonds.
Once you have this information, you can calculate the value of the bond using the following formula:
Value = Coupon / (r + 1) + Coupon / (r + 2) + ... + Coupon / (r + n)
* Value is the value of the bond
* Coupon is the bond's coupon rate
* r is the current interest rate
* n is the number of years until the bond matures
The Lehman Formula is a simple and straightforward way to calculate the value of a bond. However, it is important to note that the formula only gives an estimate of the bond's value. The actual value of a bond may be different, depending on the market conditions.
The Lehman Formula is still used by investors today to calculate the value of bonds. However, there are other methods for calculating the value of bonds, such as the Black-Scholes model.
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