How Do You Calculate the Value of a Bond?

By Stock Research Pro • February 7th, 2010

A bond is essentially an ‘IOU’ set up between an investor and a company or government entity. Under the agreement, an interest rate is set and the timing of payments that the lender will receive during the life of the bond is defined. At the end of the bond’s life- its maturity- the principal amount is returned to the lender. Companies that are looking to expand often issue bonds in order to fund that expansion. Government entities also issue bonds to raise money or fund specific projects. Investing in bonds is different from investing in other types of debt securities in that the value of the bond can fluctuate over its lifetime as interest rates rise and fall. Because bonds can be bought and sold on a secondary market, bond investors should take the time to become familiar with the bond valuation process.

A basic bond valuation calculator is below.

Bond prices are influenced by market interest rates. For example, a bond purchased with a coupon rate of 10% becomes more valuable if market interest rates fall to 9%. When assigning a present value to a bond, an investor would discount the bond’s expected cash flows with the discount rate used being driven by currently available interest rates for debt instruments that offer comparable risks and maturities.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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