Uncategorised

What is Bond Valuation?

 

Bond valuation is a method used to determine the expected trading price of a bond. The expected trading price is calculated by adding the sum of the present values of all coupon payments to the present value of the par value.

 

How To Calculate The Value of a Bond

 

Since the value of a bond is equal to the sum of the present values of the par value and all of the coupon payments, we can use the Present Value of An Ordinary Annuity Formula to find the value of a bond.

 

Bond Value Calculator

 

Instructions:

  • Enter the par value, enter the coupon rate, and select the coupon rate compounding frequency.

  • Next enter the current market rate and the number of years to maturity, then click the "Calculate Bond Price" button.

Present Value of Ordinary Annuity Formula
Bond Price = C/k *
[ 1 - [ 1 ] ]
(1 i/k)nk
i/k
P
(1 i/k)nk
Variables
C = coupon payment (Par Value * Coupon Rate)
n = number of years
i = market rate, or required yield
k = number of coupon payments in 1 year
P = value at maturity, or par value

 

 

What is Accrued Interest?

 

Accrued interest is the fraction of the coupon payment that the bond seller earns for holding the bond for a period of time between bond payments. The bond price's inclusion of any interest accrued since the last payment period determines whether the bond's price is "dirty" or "clean." Dirty bond prices include any accrued interest that has accumulated since the last coupon payment while clean bond prices do not. In newspapers, the bond prices quoted are often clean prices.

However, because many of the bonds traded in the secondary market are often traded in between coupon payment dates, the bond seller must be compensated for the portion of the coupon payment he or she earns for holding the bond since the last payment. The amount of the coupon payment that the buyer should receive is the coupon payment minus accrued interest.

Accrued Interest Formula
Accrued Interest = BV* Interest period  *
[days between settlement and last coupon payment]
Total days in period
Variables
BV= Bond Value, or par value
Interest period  = the coupon rate for the period and it equals annual coupon rate divided by number of periods in a year
*days between settlement and last coupon payment divided by total days in the payment period. It depends on the day count convention of the bond.

 

 

What is a 'Zero-Coupon Bond'?

 

A zero-coupon bond, also known as an "accrual bond," is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Some zero-coupon bonds are issued as such, while others are bonds that have been stripped of their coupons by a financial institution and then repackaged as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more than coupon bonds.

Zero Bond Price Formula
Zero Bond Price =
M
(1 i)n*2
Variables
M = value at maturity, or par value
n = number of years
i = market rate, or required yield

 

Your cache is being cleared for biocrudetech.com. Note that it may take up to two minutes for it to be fully flushed.