Bond price
Definition
Bond price is the present value of a bond's future interest payments and its maturity value, discounted at an appropriate interest rate. It reflects what investors are willing to pay for the bond in the market.
5 Must Know Facts For Your Next Test
- Bond prices and interest rates have an inverse relationship; when interest rates rise, bond prices fall and vice versa.
- The yield to maturity (YTM) is a key determinant in calculating the bond price.
- Coupon rate, which is the annual interest payment as a percentage of the face value, influences the bond price.
- If a bond sells for more than its face value, it is said to be selling at a premium; if it sells for less, it is selling at a discount.
- Factors such as credit risk, time to maturity, and prevailing market conditions also impact the bond price.
Review Questions
- How does an increase in market interest rates affect bond prices?
- What role does Yield to Maturity (YTM) play in determining a bond’s price?
- What does it mean when a bond is selling at a premium?
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Related terms
Coupon Rate: The annual interest payment made by the issuer as a percentage of the bond's face value.
Yield to Maturity (YTM): The total return anticipated on a bond if held until it matures.
Face Value: The amount paid back to the bondholder at maturity; also known as par value or principal.
