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[edit] What is a bond price?
I came here seeking the answer to the question, since the usage "price" sounded odd since even I give it an objective association such as in the price of a commodity such as gold, and I was curious how a financial instrument could have such a price. The answer is clear upon examination a few links deep but apparently doesn't make it in a clear way to the surface of the front matter here. In essence, the bond buyer is an "investor" or financier of the enterprise issuing the bond (essentially an ordinary loan at a given rate of interest rate, and possibly other terms). The "coupons" which the issuer pays in discrete time periods are the interest, earnings, profit which the buyer of the bond collects in these periods (I presume whether or not this includes principal repayment is irrelevant) . Finally, the price is the value determined from prevailing rates in the market in which the instrument is floated if the buyer had been able to obtain that rate (determined as shown in the calculations), i.e. in effect an opportunity cost calculated based on the principle of the time value of money which the buyer calculates for tying up his money in the loan embodied in the bond (in the way shown in the formulæ). 72.228.150.44 (talk) 20:45, 12 February 2009 (UTC)
[edit] Present Value explaination
The equation for the present value relationship of bond pricing is terrible for our purposes of bond valuation discussion. We should introduce the concept of bond valuation by linking to a present value page, sure, and then indicate that
- it's PVAnnuity that we use to find the present value of the interest paments and
- It's PV that we use to find the present value of the par value / face value of the bond.
- ..the sum of these two answers is described as the future cash flows of a bond or the Bond Price.
PVA(Annual interest payments) + PV(Par Value) = Bond Price
- The Bond Price is the price at which an investor is willing to buy a bond. Additional factors deteremining this price include: the discount rate and the rating of the bond (risk of default).
If a bond has a coupon rate (annual interest rate) which differs from the discount rate then the bond must be sold at either a discount or a premium (depending on whether the present value of the bond's future cash flows is greater than the face value or less than the face value). The idea of the bond is that it will provide the investor with the same interest returns as other bonds of similar ratings.
Does this seem like a better aproach to everyone else? —Preceding unsigned comment added by Xetxo (talk • contribs) 04:08, 10 March 2009 (UTC)
