All bonds include a face value, which is the amount you will receive when the bond matures. The bond's total value, or the proceeds you will get from selling it, is the sum of this face value and the bond's added value from interest. Each bond's coupon states its interest rate. When a bond returns its dividends, the investor can reinvest the returns, compounding the bond's interest. The bond's total value takes into account its principle and its compounded interest.
Add 1 to the bond's coupon rate. For example, if a bond offers a coupon of 0.06, adding 1 gives 1.06.
Raise this value to the power of the number of years in the bond's term. For example, if the bond matures after five years, raising 1.06 to the power of 5 gives 1.338.
Multiply this factor by the bond's face value. For example, if you are selling a $5,000 bond, multiplying $5,000 by 1.338 gives $6,690. This selling price for the bond takes into account its future dividends.
- "The Strategic Bond Investor: Strategies and Tools..."; Anthony Crescenzi and Mohamed El-Erian; 2010
- "All About Bonds..."; Esme Faerber; 2008