Suppose I have a $100 par value bond that pays $6 in coupons semi-anually (i.e. $3 every 6 months). The bond matures in 2 years. There will be a total of 4 cash flows, so the present value calculation is:
PV = ($3/[1 + d1]) + ($3/[1 + d2]) + ($3/[1 + d3]) + ([$3 + $100]/[1 + d4])
d4 represent the discounting rate for the individual cash flows at 6 months, 12 months, 18 months, and 24 months respectively. Each cash flow has its own discounting rate because their durations are different (e.g.
d3 should be higher than
d1, because cash flow received in 6 months has a greater present value than cash flow received in 18 months).
Now the problem is: what values do I plug in for
d4 in order to calculate the present value? At the moment, all I know is that
d4, but I do not know their exact numerical value. How do people find these values for valuing bonds?