Business Finance Online

Bond Price


The price or value of a bond is determined by discounting the bond's expected cash flows to the present using the appropriate discount rate. This relationship is expressed for a semiannual coupon bond by the following formula:

where

  • B0 = the bond value,
  • C = the annual coupon payment,
  • F = the face value of the bond,
  • r = the required return on the bond, and
  • t = the number of years remaining until maturity.

Bond Valuation Example

Find the price of a semiannual coupon bond with a face value of $1000, a 10% coupon rate, and 15 years remaining until maturity given that the required return is 12%.

Solution:

 

Par, Premium, and Discount Bonds

Par Bonds
A bond is considered to be a par bond when its price equals its face value. This will occur when the coupon rate equals the required return on the bond.
 
Premium Bonds
A bond is considered to be a premium bond when its price is greater than its face value. This will occur when the coupon rate is greater than the required return on the bond.
 
Discount Bonds
A bond is considered to be a discount bond when its price is less than its face value. This will occur when the coupon rate is less than the required return on the bond.

 

Example Problems
Find the value for the semiannual coupon bond with the following features.
Face Value: $
Coupon Rate:   %
Years to Maturity:  
Required Return:   %
Bond Price: $
   

 

© 2002 - 2010 by Mark A. Lane, Ph.D.