Definition
Bond prices move inversely with interest rates. When market yields rise above the coupon rate, the bond trades at a discount (below par). When yields fall below the coupon rate, it trades at a premium (above par). The bond pricing formula sums the present values of all future coupon payments plus the present value of the face value at maturity.
functions Formula
Price = Σ(C/(1+r)^t) + FV/(1+r)^n
lightbulb Example
A 5-year bond with 4% coupon, $1,000 face value, market yield 5%. Price = $40×[1-(1.05)^-5]/0.05 + $1,000/(1.05)^5 = $173.2 + $783.5 = $956.7 (discount to par).
verified_user Key Points
- Inversely related to interest rates
- Par value when coupon rate equals market yield
- Premium when coupon > market yield
- Converges to face value as maturity approaches (pull-to-par)