How Bond Pricing Works
The price of a bond is the present value of all its future cash flows (coupon payments + face value at maturity), discounted at the current market yield (YTM).
Bond Price Formula
Bond Price = Σ [C / (1 + r)^t] + F / (1 + r)^n
Where:
- C = Coupon payment per period
- r = Yield per period (YTM / frequency)
- t = Time period
- F = Face value
- n = Total number of periods
Key Concepts
- Coupon Rate: The annual interest rate the bond pays based on its face value.
- Yield to Maturity (YTM): The total return anticipated on a bond if held until it matures.
- Current Yield: Annual coupon payment divided by the current market price of the bond.
- Premium vs Discount: If YTM < Coupon Rate → Bond trades at Premium. If YTM > Coupon Rate → Bond trades at Discount.
Important Notes
- This calculator assumes coupons are paid on schedule and the bond is held to maturity.
- Bond prices and yields move in opposite directions.
- Taxes, call provisions, and credit risk are not considered in this basic model.