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Valuing Bonds | Boundless Finance
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The YTM is denoted by r. Step 5: Now, the present value of the first, second, third coupon payment and so on so forth along with the present value of the par value to be redeemed after n periods is derived as,. Step 6: Finally, adding together the present value of all the coupon payments and the par value gives the bond price as below,. Below are some of the Examples of Bond Pricing Formula.
Bond Value Equals the Sum of the Present Value of Future Payments
Let us take an example of a bond with annual coupon payments. Since the coupon rate is lower than the YTM , the bond price is less than the face value and as such the bond is said to be traded at discount.
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Let us take an example of a bond with semi-annual coupon payments. Since the coupon rate is higher than the YTM, the bond price is higher than the face value and as such, the bond is said to be traded at a premium. Let us take the example of a zero-coupon bond. The concept of bond pricing is very important because bonds form an indispensable part of the capital markets, and as such investors and analysts are required to understand how the different factors of a bond behave in order to determine its intrinsic value.
Similar to stock valuation, the pricing of a bond is helpful in understanding whether it is a suitable investment for a portfolio and consequently forms an integral part of bond investing. This has been a guide to Bond Pricing Formula. Here we discuss how to perform bond pricing calculations along with practical examples and downloadable excel templates. You may learn more about Fixed Income from the following articles —. Your email address will not be published.
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