


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
 B_{0} = 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.

© 2002  2010 by Mark A. Lane, Ph.D.
