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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.
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Bond Valuation Example
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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: 
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Par, Premium, and Discount Bonds
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- 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.
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© 2002 - 2007 by Mark A. Lane, Ph.D.
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