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Bond Valuation

By HWA | Publish On: May 15, 2010 | Posted In:

Bond Valuation 

A Bond is a security sold by Governments and Corporations to raise money from investors today in exchange for the promised future payment. The terms of the bond are described as part of the Bond Certificate, which indicates the amounts and dates of all payments to be made. These payments are made until a final repayment date, called maturity date of the bond. The time remaining until the repayment date is known as the term of the bond.

Bonds typically make two types of payments to their holders. The promised interest payments of a bond are called coupons. The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. The principal or face value of a bond is the notional amount we use to compute interest payments. Usually, the face value is repaid at maturity. It is generally denominated in standard increments such as $1000. A bond with a $1000 face value, for instance, is often referred as “$1000 bond”.

The amount of each coupon payment is determined by the coupon rate of the bond. This coupon rate is set by the issuer and stated on the bond certificate. By convention, the coupon rate is expresses as an APR, so the amount of each coupon payment, CPN, is

Coupon Payment = Coupon Rate × Face Value/ Number of Coupon Payments per Year

For example, a $1000 bond with a 10% coupon rate and semiannual payments will pay coupon payments of $1000 × 10% /2 = $50 every six months.

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