Coupon Bond Formula How To Calculate The Price Of Coupon Bond

What is Coupon Bond Formula?

Mathematically, it the price of a coupon bondPrice Of A Coupon BondThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more is represented as follows,

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Coupon Bond Formula (wallstreetmojo.com)

where

C = Periodic coupon payment,P = Par value of bond,YTM = Yield to maturityYTM = Yield To MaturityThe yield to maturity refers to the expected returns an investor anticipates after keeping the bond intact till the maturity date. In other words, a bond’s returns are scheduled after making all the payments on time throughout the life of a bond. Unlike current yield, which measures the present value of the bond, the yield to maturity measures the value of the bond at the end of the term of a bond.read moren = No. of periods till maturity

Calculation of the Coupon Bond (Step by Step)

Examples

Example #1

Let us take an example of bonds issued by company XYZ Ltd that pays coupons annually. The company plans to issue 5,000 such bonds, and each bond has a par value of $1,000 with a coupon rate of 7%, and it is to mature in 15 years. The effective yieldEffective YieldEffective yield is a yearly rate of return at a periodic interest rate proclaimed to be one of the effective measures of an equity holder’s return as it takes compounding into its due consideration, unlike the nominal yield method.read more to maturity is 9%. Determine the price of each bond and the money to be raised by XYZ Ltd through this bond issue.

Firstly, determine the par value of the bond issuance, and it is denoted by P. Next, determine the periodic coupon payment based on the coupon rate of the bond based, the frequency of the coupon payment, and the par value of the bond. The coupon payment is denoted by C, and it is calculated as C = Coupon rate * P / Frequency of coupon payment Next, determine the total number of periods till maturity by multiplying the frequency of the coupon payments during a year and the number of years till maturity. The number of periods till maturity is denoted by n, and it is calculated as, n = No. of years till maturity * Frequency of coupon payment Now, determine the yield to maturityDetermine The Yield To MaturityThe yield to maturity refers to the expected returns an investor anticipates after keeping the bond intact till the maturity date. In other words, a bond’s returns are scheduled after making all the payments on time throughout the life of a bond. Unlike current yield, which measures the present value of the bond, the yield to maturity measures the value of the bond at the end of the term of a bond.read more on the basis of the current market return from an investment with a similar risk profile. The yield to maturity is denoted by YTM. Next, determine the present value of the first coupon, second coupon, and so on. Then, determine the present value of the par value of the bond. Finally, the formula for determination of the coupon bond calculation is done by adding the present value of all the coupon payments and the par value, as shown below.

Below is given data for the calculation of the coupon bond of XYZ Ltd.

The price of each bond is calculated using the below formula as,

Therefore, calculation of the Coupon Bond will be as follows,

So it will be –

= $838.79

Therefore, each bond will be priced at $838.79 and said to be traded at a discount (bond price lower than par value) because the coupon rateCoupon RateThe coupon rate is the ROI (rate of interest) paid on the bond’s face value by the bond’s issuers. It determines the repayment amount made by GIS (guaranteed income security). Coupon Rate = Annualized Interest Payment / Par Value of Bond * 100%read more is lower than the YTM. XYZ Ltd will be able to raise $4,193,950 (= 5,000 * $838.79).

Example #2

Let us take an example of bonds issued by company ABC Ltd that pays semi-annual coupons. Each bond has a par value of $1,000 with a coupon rate of 8%, and it is to mature in 5 years. The effective yield to maturity is 7%. Determine the price of each C bond issued by ABC Ltd.

Below is given data for the calculation of the coupon bond of ABC Ltd.

Therefore, the price of each bond can be calculated using the below formula as,

= $1,041.58

Therefore, each bond will be priced at $1,041.58 and said to be traded at a premium (bond price higher than par value) because the coupon rate is higher than the YTM.

Relevance and Uses

The concept of pricing of this kind of bond is very important from the perspective of an investor because bonds are an indispensable part of the capital markets. The purchaser of a bond receives these coupon payments during the period between the issuance of the bond and the maturity of the bond. In the bond market, bonds with higher coupon rates are considered to be more attractive for investors because they offer higher yields.

Further, bonds trading at a value higher than their par value are said to be traded at a premium, while the bonds trading at a value lower than their par value are said to be traded at a discount. Nowadays, these bonds are quite uncommon because most recent bonds are not issued in coupon or certificate form. Rather the bondsThe BondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more are issued electronically.

What is Coupon Bond Formula?#

Calculation of the Coupon Bond (Step by Step)#

Examples#

Example #1#

Example #2#

Relevance and Uses#

Recommended Articles#