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Bond Pricing Terminology

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Bond Pricing Terminology

There are many things to consider when judging a bond’s market value. Understanding the various factors that impact bond prices can help you track how your bonds change in value, and when the time is right to buy or sell.

Things To Know

  • A bond’s par is its price when it is issued
  • Coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the face value of the investment.
  • Bonds sold on the secondary market are usually priced above or below par.

Face value and coupon rate

The face value of a bond is known as its par. A bond’s par is its price when it is issued, which is the same price that will be repaid when the bond matures.

A bond’s coupon rate is the annual percentage rate that will be paid to the owner of the bond, based on the bond’s original face value. A bond with a coupon rate of 5 percent pays 5 percent of the bond’s face value each year. Bond interest is usually paid twice a year.

Some facts

  • You can sell your bond on the secondary market before it reaches maturity. The price you get for the bond before it matures is known as its market price.
  • When the price of a bond goes above its face value, it is said to be a premium bond.
  • When the price is below its face value, it is known as a discount bond.

Bond prices on the secondary market

When you buy a bond on the secondary market, you are probably going to pay a price above or below the par of the bond. This will affect your yield-to-maturity, a calculation based on the bond’s original purchase price, redemption value, time to maturity, coupon rate, and the time between interest payments. For example, if you buy a bond and then sell it after interest rates have risen, you will likely get a lower price for the bond than what you originally paid for it. The second buyer will get a higher yield than you because he or she paid less for the bond, but the buyer will still get its full par value when it matures.

Bonds that are traded on the secondary market can have prices that are quite different from the prices at which they were originally issued. Traders look at a number of factors when assessing the market prices of bonds.