function calculateBondValue() {
// 1. Get input values
var parValue = parseFloat(document.getElementById('bond_par_value').value);
var couponRate = parseFloat(document.getElementById('bond_coupon_rate').value);
var years = parseFloat(document.getElementById('bond_years').value);
var reqReturn = parseFloat(document.getElementById('bond_req_return').value);
var frequency = parseInt(document.getElementById('bond_frequency').value);
// 2. Validate inputs
if (isNaN(parValue) || isNaN(couponRate) || isNaN(years) || isNaN(reqReturn)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (parValue <= 0 || years <= 0) {
alert("Par Value and Years to Maturity must be greater than zero.");
return;
}
// 3. Prepare variables for formula
// r = periodic required rate
// n = total number of periods
// C = periodic coupon payment
var r = (reqReturn / 100) / frequency;
var n = years * frequency;
var annualCouponAmount = parValue * (couponRate / 100);
var C = annualCouponAmount / frequency;
var pvCoupons = 0;
var pvPar = 0;
// 4. Calculate PV
// If required rate is 0, simple summation
if (reqReturn === 0) {
pvCoupons = C * n;
pvPar = parValue;
} else {
// Formula: PV = C * [ (1 – (1+r)^-n) / r ] + F / (1+r)^n
// Part A: PV of Annuity (Coupons)
var factor = Math.pow(1 + r, -n);
pvCoupons = C * ((1 – factor) / r);
// Part B: PV of Lump Sum (Par Value)
pvPar = parValue * factor;
}
var totalValue = pvCoupons + pvPar;
// 5. Display Results
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2
});
document.getElementById('res_pv_coupons').innerHTML = formatter.format(pvCoupons);
document.getElementById('res_pv_par').innerHTML = formatter.format(pvPar);
document.getElementById('res_total_value').innerHTML = formatter.format(totalValue);
// Determine if Discount, Premium, or Par
var status = "";
if (Math.abs(totalValue – parValue) < 0.01) {
status = "trading at Par.";
} else if (totalValue < parValue) {
status = "trading at a Discount.";
} else {
status = "trading at a Premium.";
}
document.getElementById('res_summary').innerHTML = "Given a coupon rate of " + couponRate + "% and a required return of " + reqReturn + "%, this bond is " + status;
document.getElementById('result-area').style.display = 'block';
}
Understanding Bond Valuation with Required Rate of Return
The Bond Value Calculator helps investors determine the theoretical fair price of a bond based on its cash flows and the investor's required rate of return. Unlike stocks, the cash flows of a standard bond are known in advance: regular coupon payments and the return of the par (face) value at maturity.
The value of a bond is calculated by finding the Present Value (PV) of these future cash flows. This requires discounting the future payments back to today's dollars using a discount rate, which in this context is your Required Rate of Return (often synonymous with the market Yield to Maturity or YTM for similar bonds).
The Bond Valuation Formula
The calculation involves two distinct parts: the present value of the annuity (the series of coupon payments) and the present value of the lump sum (the face value repaid at the end).
Bond Value = [ C × (1 – (1 + r)-n) / r ] + [ F / (1 + r)n ]
Where:
C = Periodic coupon payment ($)
F = Face value (Par value) of the bond
r = Periodic required rate of return (Annual Rate / Frequency)
n = Total number of periods (Years × Frequency)
Why the Required Rate of Return Matters
The relationship between the bond's Coupon Rate and the investor's Required Rate of Return determines if a bond sells at par, a discount, or a premium:
Trading at Par: If Required Rate = Coupon Rate, the Bond Value = Face Value.
Trading at Discount: If Required Rate > Coupon Rate, the bond must sell for less than face value to offer the investor that higher return.
Trading at Premium: If Required Rate < Coupon Rate, the bond pays more than the market demands, so it sells for more than face value.
Example Calculation
Imagine a corporate bond with the following characteristics:
Face Value: $1,000
Coupon Rate: 5% (Pays $50 per year)
Frequency: Semiannual (Pays $25 every 6 months)
Years to Maturity: 10 years
Required Rate of Return: 6%
Because the required return (6%) is higher than the coupon rate (5%), we expect this bond to trade at a discount. Using the calculator above, the value comes out to approximately $925.61. This means you would pay $925.61 today to receive $25 every 6 months for 10 years, plus $1,000 at the end, effectively earning a 6% annual return on your investment.