Bond Lifecycle Pricing Model
A bond is born at par, dies at par — only the middle is dirty.
Nakisa's lifecycle model treats a bond as having three reference points: birth (issuance at par £100), death (maturity at par £100), and the volatile middle. By definition, the bond is worth £100 at both endpoints — the issuer borrows £100 and repays £100. Between these points, price fluctuates with interest rates and credit spreads.
Duration approximates how much price moves per 1% rate change: a 2-year bond moves ~2%, a 10-year bond ~10%, a 30-year bond ~20%. Convexity is the asymmetric bonus — for standard government bonds, prices rise more when rates fall than they fall when rates rise. This makes long gilts mathematically attractive: positive convexity means risk-reward tilts in the holder's favour.
A fourth concept — clean vs dirty price — captures the accrued coupon between payment dates. The quoted clean price is what you see; the dirty price is what you actually pay or receive.
- A bond's price equals £100 at issuance and at maturity — only the middle is uncertain.
- Duration ≈ price sensitivity in % per 1% rate move — multiply by years for the rough impact.
- Convexity makes risk-reward asymmetric in the holder's favour for standard government bonds.
- Clean price is quoted; dirty price (clean + accrued coupon) is paid.
- If you hold to maturity, mid-life price swings are noise.
- Anchor on par valueWhatever the quoted price today, the bond will be worth £100 on its maturity date. Frame all gains and losses against that endpoint.
- Calculate duration impactMultiply the bond's duration (in years) by the rate move (in %). A 10-year duration with a 1% rate hike means roughly -10% price.WarningDuration is an approximation — convexity makes the actual move slightly less negative on hikes and more positive on cuts.
- Decompose return into coupon + capital gain/lossTotal return = coupon yield + (par value − purchase price) ÷ holding period. Buy below par for capital gain, above par for capital loss.
- Adjust quoted price for accrued couponIf you buy mid-coupon-period, add the prorated accrued coupon to the clean price to get the dirty price you actually pay.
- Lock in or sell at the right pointIf holding to maturity, ignore price moves. If selling early, monitor the rate environment — falling rates = capital gain, rising rates = capital loss.
- Use convexity for long-duration positions30-year gilts have positive convexity — they gain more when rates fall than they lose when rates rise. This makes them attractive when rates look likely to peak.WarningSome bonds (e.g. US mortgage-backed securities) have negative convexity — avoid those unless you understand the embedded prepayment option.
30-year gilts lost ~40% as yields rose ~2%. Pension funds with LDI hedges became insolvent because their worst-case scenarios assumed sane policy.
A 1-year gilt bought at £95 with a 1% coupon: £5 capital gain + £1 coupon = ~6% total return, known on the day of purchase.
David Bowie and Justin Bieber sold music catalogue royalty streams as bonds — receiving lump sums upfront while bondholders received future royalty cash flows.
Nakisa, with a background in quantitative finance and pension education, distilled this from years of teaching retail investors who couldn't reconcile the gap between mark-to-market quotes and what they'd actually receive at maturity. The lifecycle metaphor — comparing bonds to people on a dating app, with birth dates, salaries (coupons), and death dates — is his pedagogical signature.