This bond price calculator estimates the bond’s expected selling
price by considering its face/par value, coupon rate and its
compounding frequency and years until maturity. There is in depth
information on this topic below the tool.
This financial calculator approximates the selling price of a
bond by considering these variables that should be provided:
-
Face/par value which is the amount of money the bond holder
expects to receive from the issuer at the maturity date as
agreed.
-
Coupon rate is the annual rate of return the bond generates
expressed as a percentage from the bond’s par value.
-
Coupon rate compounding frequency that can be Annually,
Semi-annually, Quarterly si Monthly.
-
Market interest rate represents the return rate similar bonds
sold on the market can generate. This figure is used to see whether
the bond should be sold at a premium, a discount or at its face
valueas explained below.
The algorithm behind this bond price calculator is based on the
formula explained in the following rows:
Where:
F = Face/par value
c = Coupon rate
n = Coupon rate compounding freq. (n = 1 for Annually, 2 for
Semiannually, 4 for Quarterly or 12 for Monthly)
r = Market interest rate
t = No. of years until maturity
After the bond price is determined the tool also checks how the
bond should sell in comparison to the other similar bonds on the
market by these rules:
-
IF c = r then the bond should be selling at par value.
-
IF c <> r AND Bond price > F then the bond should be
selling at a premium.
-
IF c <> r AND Bond price < F then the bond should be
selling at a discount.
Let’s assume that someone holds for a period of 10 years a bond
with a face value of $100,000, with a coupon rate of 7% compounded
semi-annually, while similar bonds on the market offer a rate of
return of 6.5%. Let’s figure out its correct price in case the
holder would like to sell it:
■ Bond price =
$103,634.84
■ Considering that the
bond price is higher than the par value the bond should be selling
at a premium.
In finance bonds are often referred to as fixed-income
securities as they are a type of investment in which the holder
(usually called as the investor) lends money to a bond issuer
(usually governmental e.g: foreign governments, municipalities,
states or corporate organizations) for a specific period of time
while the borrower understands to pay to the investor a fixed
interest rate, compounded by the rule negotiated and paid within
certain terms. Usually bonds are issued to help such entities
finance big or public projects such as utilities, infrastructure,
research and development health related.
Examples of categories of bonds are:
01 Mar, 2015
