A security for debt in which the official issuer owes the holder a debt is called a ‘bond’. Depending on the terms of the bond, the holder of the debt is obliged to pay the interest or to repay the principle at a later date which is termed as maturity. In other words, bond is an official contract to return borrowed money with interest at fixed intervals. How to calculate bonds is a very important thing to know, if you are going to issue a debt or hold a debt.
When a bond is issued, the amount of interest which is to be paid by the holder is fixed until the bond matures. For the adjustment for changing interest rates, the market value of the bond is increased or decreased over time. Let us suppose, if a bond gives an 8 percent annual coupon rate and present rate is 5 percent then the bond will be sold at a premium price to carry the return to a new owner in line with present rate. An expected price of a premium bond can be computed using the present yield and the coupon rate or a simple table can be set up to compute an accurate present price. In this article, you will get to know how to calculate bonds.
For the calculation of bond, some steps are given below:
The bonds can be calculated through two methods
- 1. Quick price calculation method
- 2. Spreadsheet price calculation method
Quick price calculation method
- Find out the present yield for comparable bonds. The time to maturity, coupon rate and annual interest of the bond should be known. The Wall Street Journal provides a listing of present bond data, both in print and online at wsj.com.
- An expected bond value is the annual coupon rate divided by the present yield. For example, let us suppose, if a bond gives $ 80 per year in interest per $ 1,000 of face amount i.e. 8 percent coupon and the present market yield is 7 percent, calculation will be $ 80 divided by 0.07. In such case, the premium value for a $1,000 will be $ 1,142.85.
- This premium calculation should be used to have an idea for what a premium bond is worth. The accuracy of the estimation depends upon the period of maturity. The estimation would be more accurate if the period of maturity is longer.
Spreadsheet price calculation method
- Using spreadsheet software like Open Office Calculator or Microsoft Excel, make two columns one for the labels and the second for the data.
- Write these labels into the label column.
- Today’s Date
- Maturity Date
- Coupon Rate
- Current Yield
- Par Value
- Frequency
- Price
- Write the data considering the label into the second column. The date when the bond principal will be returned to the bond holder is called the maturity date. Coupon rate and present yield should be written in percentage. For example, a $ 1,000 bond giving $ 40 twice a year will be having a coupon rate of 8 percent. Par value is the maturity value given in percentage, generally 100. But you have to enter this value as a whole number, not as a percentage. The number of interest payments per year is the frequency, which is generally two.
- In the column which is next to the price label, write the PRICE function using the entered data. If the data is written in column B, the formula will be like this.
PRICE = B1, B2, B3, B4, B5, B6. The PRICE function will give a present value of the bond which is on the data provided.
- See the outcome of your spreadsheet. Using an 8 percent coupon, 7 percent present yield and a 30 year maturity period from the present date should give a price of $ 112.47. This means a $ 1,000 face amount bond will be having a premium price of $ 1,124.70. If the outcomes are correct, you can find out the premium value of any bond with the given market coupon rate.
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