Bond Price Calculator
Calculate the current price for a bond using our bond price calculator.
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Andrew holds a Bachelor's degree in Finance and a Bachelor's degree in Political Science from the University of Colorado and specializes in finance, real estate, and life insurance.
How to Calculate Bond Price
Bonds are one of the most important investment options you’ll find within the broader securities community. In fact, while speculative securities—like stocks—typically get much more attention in the media, most major financial players (particularly, banks) will actually own significantly more bonds than they own stocks.
When market conditions change, these institutions might make minor changes to their portfolio construction (preferring stocks during bull markets and bonds in recessions), but the pure dominance of bonds within the securities industry remains unrivaled.
Bonds, in theory, are instruments that entitle the bond holder to a pre-determined payment at some pre-determined point in time. There might also be a series of payments made along the way, which is known as the bond’s coupon.
Institutions enjoy investing in bonds because they are predictable and easy to acquire, and individual investors also frequently invest in bonds for the very same reason. But regardless of whether you are a bank or an individual investor, knowing how to calculate a bond’s price is important.
Variables That Affect a Bond’s Price
In order to calculate a bond’s price, you will first need to identify several important variables:
- Coupon Rate (C): The promised payments the bond will make, periodically, between now and maturity.
- Face Value (FV): The amount the bond will pay out once it is fully mature (typically, the face value is $1,000).
- Yield to Maturity (R): The total return generated if someone were to hold the bond until maturity.
- Number of Coupon Payments Per Year (N): How often coupon payments are made per year—one is standard, but some bonds will make biannual or monthly payments.
- Years to Maturity (T): The total amount of time, in years, the bond has left until it pays out face value.
Now that you have identified the variables needed to calculate bond price, all you need to do is plug these figures into the following formula:
Where:
C = coupon rate
FV = face value
r = yield to maturity
n = number of coupon payments per year
t = years to maturity
Of course, if you don’t want to do all of the math yourself, using a bond price calculator like the one above can help.
Zero Coupon Bond Price Formula
While many bonds will issue coupon payments, some will only pay out once they are fully mature. These are known as zero-coupon bonds.
To calculate the price of a zero-coupon bond, use the following formula:
Where:
FV = face value
r = yield to maturity
t = years to maturity
Example
Let’s suppose that a bond has a face value of $1,000, an annual coupon payment of $30, 10 years to maturity, and a 5 percent yield to maturity.
In this situation, you would receive $30 every year for the next 10 years, followed by a $1,000 final payment. If you were to buy the bond today—assuming there is no risk of default—this bond would cost $845.57.
You might also be interested in our bond yield calculator to find the current yield.
Do Bonds Always Go Up in Value?
Generally speaking, bonds will continue to increase in value as they get closer to maturity. This is because the final face value payment, which is almost always the largest portion of the bond, will come sooner, rather than later.
From an investor’s perspective, when all else is equal, you’ll want to get your money back as soon as possibly can. This is due to a concept known as the time value of money (TVM).
However, there are a few situations where bonds could decrease in value over time. If the bond has an unusual coupon structure, with high-priced coupons being paid out early, investing in the bond early on might be more beneficial.
Are Bonds a Safe Investment?
In most cases, bonds are considered a safe investment. The payouts offered by bonds are guaranteed, so long as the issuer doesn’t default. Organizations like Moody’s and S&P rate the riskiness of default, with AAA bonds considered virtually risk-free and BBB bonds (or lower) considered a bit riskier.
The risk of investing in bonds will depend on who is issuing the bonds. If the bonds are from the United States government, they are considered very low risk because the government has never defaulted (and has the power to increase the money supply).
But if the bonds are issued by a corporation with clear insolvency issues, then the risk of default will be much higher.
This is not financial advice or a guarantee of success, so be sure to consult with a financial professional and understand the risk associated with any bond you are considering before investing.