PDA

View Full Version : How do you compute current price of bonds?


cdramaqueen110
Mar 29, 2008, 10:24 PM
How do you compute current price of bonds knowing the yielding maturity, interest rate and price per bond?

morgaine300
Mar 30, 2008, 10:30 PM
The basic steps are:

1. Figure out the interest payment using the contract rate on the bond.
2. Figure out the present value of the bond face value.
3. Figure out the present value of the series of interest payments.
4. Add together 2 & 3.

For 2 & 3 you need to be using the yield rate, because you're trying to figure out the present value that would yield that amount. (2) is the present value of $1, and (3) is the present value of an annuity (or series of payments). These need figures based on compounding periods, which is determined by how often interest payments are made. If this is annual, you don't need to worry about it. If it's semi-annual, you'll want to divide the interest rates in half (for a half year) and double the number of years to maturity (at two periods per year).

Now, how you actually go about figuring those present values depends on the method you must or want to use, i.e. charts, equations, calculator or Excel. But the above info might help you get started. If you want to get more specific, let us know which method you're using.