💰 Bond Price Calculator
Calculate bond valuation, yield to maturity, and total returns with different compounding frequencies
| Period | Coupon Payment | Principal | Total Cash Flow |
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📊 How Bond Pricing Works
A bond's price is calculated as the present value of its future cash flows, which include periodic coupon payments and the return of principal at maturity.
The formula used to calculate bond price is:
Where:
- C = Coupon payment per period
- r = Market interest rate per period
- n = Total number of periods until maturity
- F = Face value of the bond
Key concepts in bond valuation:
- Face Value: The amount repaid at maturity
- Coupon Rate: The annual interest rate paid by the bond
- Yield to Maturity (YTM): The total return anticipated if held to maturity
- Compounding Frequency: How often interest payments are made
When market interest rates rise above a bond's coupon rate, the bond will trade at a discount to its face value. When market rates fall below the coupon rate, the bond will trade at a premium.
Bond prices and interest rates have an inverse relationship. When market interest rates rise, existing bond prices fall because new bonds are issued with higher coupon rates. Conversely, when market rates fall, existing bond prices rise as their fixed coupon payments become more attractive.
Yield to maturity is the total return anticipated on a bond if it is held until it matures. YTM is expressed as an annual rate and considers both coupon payments and any capital gain or loss that occurs as the bond moves toward its maturity date at its current market price.
A bond sells at a premium when its price is above face value, which happens when its coupon rate is higher than current market rates. A bond sells at a discount when its price is below face value, which occurs when its coupon rate is lower than current market rates.
More frequent compounding (semi-annual vs. annual) generally increases the effective yield of a bond because interest is earned on interest more frequently. This affects the bond's price calculation as the discount rate is applied more frequently.
The main risks include interest rate risk (prices fall when rates rise), credit risk (issuer may default), inflation risk (purchasing power erosion), and liquidity risk (difficulty selling). Longer-term bonds typically have higher interest rate risk but may offer higher yields.