How Do You Calculate Selling Price Of A Bond?
A bond price is derived from two sources because the bond has two sets of distinct cash flows. The two sources are the interest payments and the face value of the bond. Whoever issues the bond promises to pay the face value of the bond when it matures. From the point the bond sells to the maturity date, the bond will pay interest. The bond price will differ from the face value of the bond if the stated interest rate is different than the market interest rate. For example, a bond has a $100,000 face value that matures in three years. The stated interest rate is 6 percent and the market interest rate is 4 percent. The bond pays interest semi-annually. Determine the present value of an annuity factor and the present value of $1 factor using the present value tables. Use half the market interest rate as the rate on the table and the double the years for the term. This is because the bond pays semi-annually. In our example, use 2 percent and six years. Therefore, the present value an annuit
