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

1. Bond prices and interest rates have an inverse relationship; when interest rates rise, bond prices fall and vice versa.
2. The yield to maturity (YTM) is a key determinant in calculating the bond price.
3. Coupon rate, which is the annual interest payment as a percentage of the face value, influences the bond price.
4. 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.
5. 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?

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.