A Bond Price Calculator

By Stock Research Pro • September 17th, 2009


A bond is a debt security that provides a vehicle for the U.S. government, a state, a local municipality or a large corporation to borrow money. The issuer of the bond agrees to pay the lender (holder of the bond) a specified rate of interest during the bond’s life and then full repayment of the bond’s “face value” at the end of the bond’s life- its maturity. Bonds are issued to help provide the issuing entity with the money it needs to operate while offering investors a predictable stream of income and stability to a portfolio. For many investors, bonds can play a significant role in achieving their financial goals.

Types of Bonds

There are three primary bond types:

Treasuries: These are the bonds issued by the federal government in a variety of maturities, anywhere from several months to several decades. Treasury notes, treasury bills, and treasure bonds all fall into this category. Each is backed and guaranteed by the U.S. government and provide exemption to state and local taxes.

Municipal Bonds: Municipal bonds or “munis” are issued by state and local governments and offer competitive interest rates along with, in many cases, exemption from federal income tax on interest payments. Some of these issues also offer exemption from state and local taxes (triple tax-exempt), making these very attractive investment options for high tax bracket investors.

Corporate Bonds: Corporate bonds are issued by companies and normally offer higher interest rates than government-issued bonds because there is always the risk that the company will go bankrupt. A high-yield category of corporate bonds known as “junk bonds” are issued by companies whose credit quality is less than investment grade.

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Pricing a Bond

Generally speaking, the price of a bond is the total value of its coupon payments plus the bond’s par value at maturity, discounted to present value. As you may know, the concept of present value works on the assumption that investors have a required rate of return that is driven by returns they could reasonably expect from alternative investments.

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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