Bonds normally pay interest, and when the bond matures, its face value is paid back to the investor. When purchasing a bond, the investor should know the bond's face value, interest rate and maturity date. The bond price will vary depending on the market interest rate. If that rate is less than the bond's interest rate, the bond will sell for more than its face value. If the market interest rate is more than the bond's interest rate, the bond will sell for less than its face value. To find the bond's market price, you need to do some calculations involving the interest payments and the bond's face value.
Multiply the interest payments by the present value of an ordinary annuity factor, which is found on the present value of an ordinary annuity table (see Resources), to calculate the present value of interest payments. For example, a $200,000 face value bond that pays 10 percent interest semiannually will mature in five years. The current market interest rate is 16 percent. The interest payment is $200,000 times 5 percent, which equals $10,000 for 10 periods. On the present value of an annuity table, use 10 periods and 8 percent, for a factor of 6.7101. Therefore, the present value of interest payments is $10,000 times 6.7101, which equals $67,101.
Multiply the face value of the bond by the present value of $1 factor, which is found on the present value of $1 table (see Resources), to calculate the present value of the bond's face value. In our example, use 8 percent for 10 periods on the present value of $1 table, which equals 0.4632. Therefore, $200,000 times 0.4632, equals $92,640 as the present value of the bond's face value.
Add the present value of interest payments to the present value of the bond's face value to find the current market price for the bond. In our example, $67,101 plus $92,640 equals a market value of $159,741.
- Money Chimp: Bond Yield to Maturity
- Money Instructor: Bond Valuation, Calculation, Finance Basics
- U.S. Securities and Exchange Commission. "Investor Bulletin: Fixed Income Investments — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall." Accessed April 19, 2020.
- Moody's Investors Service. "Look up a rating." Accessed April 19, 2020.
- S&P Global. "Ratings." Accessed April 19, 2020.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.