![]() Each payment is discounted to the current time based on the yield to maturity (market interest rate). The Time Value of Moneyīonds are priced based on the time value of money. The number of periods will equal the number of coupon payments. These are typically annual periods, but may also be semi-annual or quarterly. Bond Pricing: Periods to Maturityīonds will have a number of periods to maturity. This is because the bondholder will receive coupon payments that are higher than the market interest rate, and will, therefore, pay a premium for the difference. A bond could be sold at a higher price if the intended yield (market interest rate) is lower than the coupon rate. Alternatively, the causality of the relationship between yield to maturity and price may be reversed. A bond that sells at a premium (where price is above par value) will have a yield to maturity that is lower than the coupon rate. Bond Pricing: Yield to Maturityīonds are priced to yield a certain return to investors. The price of a bond comprises all these payments discounted at the yield to maturity. Purchasers of zero-coupon bonds earn interest by the bond being sold at a discount to its par value.Ī coupon-bearing bond pays coupons each period, and a coupon plus principal at maturity. A zero-coupon bond pays no coupons but will guarantee the principal at maturity. The principal value is to be repaid to the lender (the bond purchaser) by the borrower (the bond issuer). Without the principal value, a bond would have no use. Bond Pricing: Principal/Par ValueĮach bond must come with a par value that is repaid at maturity. Zero-coupon bonds are typically priced lower than bonds with coupons. In this case, the bond is known as a zero-coupon bond. For example, a 10% coupon on a $1000 par bond is redeemable each period.Ī bond may also come with no coupon. Each coupon is redeemable per period for that percentage. A coupon is stated as a nominal percentage of the par value (principal amount) of the bond. These characteristics are:Īlternatively, if the bond price and all but one of the characteristics are known, the last missing characteristic can be solved for.Ī bond may or may not come with attached coupons. The price of a bond depends on several characteristics inherent in every bond issued. Bond pricing is an empirical matter in the field of financial instruments.
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