What is the price of bonds? Definition of the bond price, meaning of the bond price



Definition: The bond price is the present present value of future cash flows generated by a bond. This is the sum of the present values ​​of all probable coupon payments plus the present value of the face value at maturity. To calculate the price of the bond, it suffices to discount the known future cash flows.

The description: The price of a bond and its yield to maturity are negatively correlated to each other. When the yield to maturity is greater than the coupon rate, the price of a bond is lower than its face value and vice versa. Usually, bonds are issued at interest rates close to the going interest rate, so they can be sold near their face value.

However, over time, bonds frequently trade at prices different from their face value. While two parties can agree on a price and execute a trade, a large majority of bonds are sold either through a public sale or through an exchange platform and the price of the bond is therefore determined by the market and, therefore, may vary. every minute.

The price of a bond issued by a party is directly related to that party’s credit rating, since there is always a risk of default associated with a bond, which means that the borrower might not be able to pay the full or partial amount of the contracted loan obligation. Thus, low-rated bonds, called junk bonds, are sold at lower prices, and higher-rated bonds, called quality bonds, are sold at higher prices.

When interest rates rise, bond prices fall, resulting in higher yields on older bonds and placing them in the same category as newer bonds issued with higher coupons and vice versa.



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