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Such bonds make only one payment: the payment of the face value on the maturity date. Normally, to compensate the bondholder for the time value of money , the price of a zero-coupon bond will always be less than its face value on any date before the maturity date. During the European sovereign-debt crisis , some zero-coupon sovereign bonds traded above their face value as investors were willing to pay a premium for the perceived safe-haven status these investments hold. The difference between the price and the face value provides the bondholder with the positive return that makes purchasing the bond worthwhile.

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Between a bond's issue date and its maturity date also called its redemption date , the bond's price is determined by taking into account several factors, including:. From Wikipedia, the free encyclopedia. Economics: Principles in Action.

Valuing Bonds

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Find bond valuation (interest paid semi annually) by using financial calculator

Accrual bond Auction rate security Callable bond Commercial paper Consol Contingent convertible bond Convertible bond Exchangeable bond Extendible bond Fixed rate bond Floating rate note High-yield debt Inflation-indexed bond Inverse floating rate note Perpetual bond Puttable bond Reverse convertible securities Zero-coupon bond. Like a stock, the value of a bond determines whether it is a suitable investment for a portfolio and hence, is an integral step in bond investing. The theoretical fair value of a bond is calculated by discounting the present value of its coupon payments by an appropriate discount rate.

It takes into account the price of a bond, par value, coupon rate, and time to maturity. Calculating the value of a coupon bond factors in the annual or semi-annual coupon payment and the par value of the bond.

Bond Valuation

The present value of expected cash flows is added to the present value of the face value of the bond as seen in the following formula:. A zero-coupon bond makes no annual or semi-annual coupon payments for the duration of the bond. Instead, it is sold at a deep discount to par when issued. To calculate the value of a zero-coupon, we only need to find the present value of the face value. Fixed Income Essentials. Investopedia uses cookies to provide you with a great user experience.

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Bond Valuation Definition

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What Is Bond Valuation? Coupon rate: Some bonds have an interest rate, also known as the coupon rate, which is paid to bondholders semi-annually. The coupon rate is the fixed return that an investor earns periodically until it matures.

1) What are Bonds?

Maturity date: All bonds have maturity dates , some short-term, others long-term. When the bond matures, the bond issuer repays the investor the full face value of the bond. The face value is not necessarily the invested principal or purchase price of the bond. Current Price: Depending on the level of interest rate in the environment, the investor may purchase a bond at par, below par, or above par. For example, if interest rates increase, the value of a bond will decrease since the coupon rate will be lower than the interest rate in the economy.

When this occurs, the bond will trade at a discount , that is, below par. However, the bondholder will be paid the full face value of the bond at maturity even though he purchased it for less than the par value.