The J-value as the measurement tool of the bonds investor's behavior

Abstract

For many years, mathematics has been used to solve the problem in economic and finance instead of natural science and engineering. This paper shows how accurate mathematics reads financial behavior. One of the financial areas using the mathematics approach is the bond valuation technique. Bond is one of the long term debt instruments. The finding in this research is that mathematics can be used to read the changes in the concept of a pricing model where the par value of bonds is always going to 100% at the maturity date. Theoretically, the bonds fair price is resulted by calculating the present value of future coupon interest of bonds, but not in practice, caused by the bonds investor behavior. The difference in price, resulted from both different approaches, in this paper is defined by a new mathematical concept to reflect the bonds' investor behavior. It is the aim of this research. To address the differences, we have evaluated the fair price of bonds calculation by creating new mathematics equations by combining the calculation of the present value of future coupon interest of bonds with the market concept models. The result is a new mathematical model called J-Value. To prove the eligibility of J-Value, a simulation was done. The mathematics model in this paper is found by combining the usage of a qualitative method and supported by a quantitative method.