Bond Value Calculator
Valuation Result
Fair Market Value
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Bond Pricing Type
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Current Yield
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Understanding Bond Valuation
Bond valuation is a technique used to determine the theoretical fair value (or intrinsic value) of a particular bond. This calculation is crucial for investors who want to decide whether a fixed-income security is worth purchasing based on current market conditions.
How the Bond Value is Calculated
The price of a bond is the sum of the present value of all future interest payments (coupons) plus the present value of the bond's face value (par value) upon maturity. The discount rate used for these calculations is the Yield to Maturity (YTM), which represents the current market required rate of return.
The Mathematical Formula:
- C: Coupon payment per period
- r: Market yield per period
- n: Total number of periods
- F: Face value of the bond
Key Concepts
- Premium Bond: Occurs when the Coupon Rate is higher than the Market Yield (YTM). The bond sells for more than its face value.
- Discount Bond: Occurs when the Coupon Rate is lower than the Market Yield. The bond sells for less than its face value.
- Par Bond: Occurs when the Coupon Rate equals the Market Yield. The bond price equals the face value.
Example Calculation
Imagine a bond with a Face Value of $1,000, a Coupon Rate of 6%, and 5 years to maturity. If the current Market Yield (YTM) is 4% and interest is paid Semi-Annually:
- The semi-annual coupon (C) is $30 ($1,000 * 0.06 / 2).
- The semi-annual yield (r) is 2% (0.04 / 2).
- The total periods (n) is 10 (5 years * 2).
- The calculated price would be approximately $1,089.83. Since the price is above $1,000, this is a premium bond.