Bonds can be sold at various prices depending on the market interest rates at the time. They can be sold at discount (below market) premiums (above market) or at "par" (face value). The value of the bond is determined by fluctuations in the interest rates and will provide a guide as to the payouts that the bond will give to you or how much "cash flow" it is expected to provide. If a bond's value diminishes, it must be discounted to the buyer. In other words, if its interest rate was 10 percent 5 years ago but the market rate is only 7 percent now, the bond must be discounted to account for less payout amounts over the life of the bond. You can calculate the discount rates of your bond if you know your basic bond values and some algebra.
1Determine how many coupon payments will be made on your bond (most bonds make 2 payments per year so if it is paid over 10 years, you have a total of 20 payments).Ad
2Find the coupon rate being paid for the bond for 1 coupon payment (if given as "X percent, multiply the number by 100 to get a decimal. For example, at 5 percent, multiply 5 by 100 to get 0.05). NOTE: This is the amount off the bond's face value and not the bond's yield percentage rate.
3Multiply the coupon rate calculated by the bond's face (par) value (for example, 0.05 x $5,000 = $250) to get the semi-annual payment.
4Calculate the yield (percentage) by dividing the annual yield by 2 to get the semi-annual yield (for example, if the bond yield is 10 percent, divide 10 by 100 to get 0.10 and divide by 2 to get 0.05). This is the bond's interest rate.
5Use the following formula to calculate the bond price at a discount with a financial calculator or use an online bond calculator: coupon value * (1-[1/1 + interest ^ number of payments] /interest) + face value /(1 + interest ^ number of payments).Ad
We could really use your help!
- When calculating your bond price, you determine the maximum you want to pay compared with the average rate received by most investors in the market. There is a required yield (rate of return) offered to encourage buyers, which is normally the current market interest rate.
- Remember that it is perfectly reasonable to expect a discount rate on a bond that is paying less than the current market rate. For example, if a bond is paying only 8 percent and the market rate is 11 percent, you should expect a discount on that bond because your semi-annual coupon payment will be less and the bond's face value will never be fully paid.
Things You'll Need
- Bond information
- Paper, pen or pencil
- Financial calculator or online bond calculator
Categories: Financial Bonds
In other languages:
Thanks to all authors for creating a page that has been read 33,745 times.