How to Calculate Bond
What is Bond?
A bond is a fixed-income security — a loan from an investor to a borrower (government or corporation). The bond pays regular coupon payments and returns the face value at maturity. Bond prices move inversely to interest rates: when rates rise, bond prices fall.
Step-by-Step Guide
- 1Bond price = PV of all future cash flows discounted at YTM
- 2P = Σ[Coupon/(1+YTM)ᵗ] + Face Value/(1+YTM)ⁿ
- 3If YTM > coupon rate: bond trades at discount (price < face value)
- 4If YTM < coupon rate: bond trades at premium (price > face value)
Worked Examples
Input
$1,000 face, 5% coupon, YTM 6%, 10 years
Result
Price = $926.40 (discount)
Higher YTM → lower price
Input
$1,000 face, 5% coupon, YTM 4%, 10 years
Result
Price = $1,081.11 (premium)
Lower YTM → higher price
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