The discount rate used to calculate the net present value (NPV) of the DCF to equal zero is the equivalent yield, or the IRR.
[14] The calculation not only takes into account all costs, but other assumptions including rent reviews and void periods.
A trial and error method can be used to identify the equivalent yield of a DCF, or if using Excel, the goal seek function can be used.
This reflects the tendency for investors to require compensation for the additional risk that the issuer may default on its obligations to pay interest and repay the principal at par value.
Fears of high inflation in the future mean that investors ask for a higher yield today to protect their purchasing power.
[16] Conversely, if market rates decline, then the price of the bond should increase, driving its yield lower, all else being equal.
This reflects the fact that long-term securities are more exposed to the uncertainties of what could happen in the future—especially changes in market rates of interest.
Coupon payments from floating rate bonds and notes and Treasury Inflation Protected Securities are reset periodically based on a specified benchmark.