Bond Price Calculation Examples, Concepts, Illustrations, Sample Help Online
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What is a Bond?
A bond is an instrument of debt on which interest is paid periodically based on the stated rate of interest and return the principal at the maturity.
The present value of interest payments is calculated using the formula for present value of an annuity and the present value of the face value is calculated using the formula for present value of a single sum occurring in future.
where r is the current interest rate, c is the coupon rate on the bond, t is the time periods occurring over the term of the bond and F is the face value of the bond, the present value of interest payments is calculated using the following formula
Present Value of Interest Payments = c × F × 1 − (1 + r)-t
r
The present value of the face value (i.e. the maturity value) is calculated as follows
Present Value of Face Value of a Bond = F
(1+r)t
Therefore, the price of a bond is given by the following formula
Present Value of Interest Payments = c × F × 1 − (1 + r)-t + F
r (1 + r)t
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Bond Price Calculation Examples
Example 1: Bond with annual coupon payments
Company A has issued a bond having face value of $100,000 carrying annual coupon rate of 8% and maturing in 10 years. The market interest rate is 10%.
Price of Bond = 8% × $100,000 × 1 − (1 + 10%)-10 + $100,000
10% (1 + 10%)10
Price of Bond = $87,711
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