What is Bond Valuation?
Bond valuation is the process of determining what a bond is worth based on its future cash flows. The value is the sum of all coupon payments (interest) and the principal, all discounted to today's value using the market interest rate.
Bond valuation calculates the present value of all future coupon payments and principal repayment, discounted at the market interest rate. Higher market rates lower bond prices; lower rates raise them.
Try it: interactive calculator
Step-by-step worked examples
Bond: $1000 face, 5% coupon ($50/year), 5-year maturity, market yield 5%. What is its value?
PV of coupons: $50/(1.05)^1 + $50/(1.05)^2 + $50/(1.05)^3 + $50/(1.05)^4 + $50/(1.05)^5 = $216.48 PV of principal: $1000/(1.05)^5 = $783.53 Bond value = $216.48 + $783.53 = $1000 (par value)
Same bond, but market yield is now 7%. New value?
PV of coupons: $50/(1.07)^1 + … + $50/(1.07)^5 = $205.08 PV of principal: $1000/(1.07)^5 = $712.99 Bond value = $205.08 + $712.99 = $918.07 (discount)
Same bond, market yield 3%. New value?
PV of coupons: $50/(1.03)^1 + … + $50/(1.03)^5 = $229.23 PV of principal: $1000/(1.03)^5 = $863.84 Bond value = $229.23 + $863.84 = $1093.07 (premium)
Flashcards
Quick quiz
Q1.What is the main factor that changes a bond's value?
Q2.If market yield = coupon rate, bond price = ?
Q3.What is the coupon payment on a $1000 bond with 6% coupon?
Q4.A $1000 bond trades at $950. This is…
The full card deck, worked steps and AI-tutor support for “What is Bond Valuation?” are in Notek — study by hand before your exam.
Common mistakes
Thinking coupon rate and yield are the same. — Correct: Coupon is fixed; yield is the market return, which changes daily.
Assuming high coupon = high bond price. — Correct: If yield rises above coupon, bond price falls despite high coupons.
Ignoring the discount rate (yield). — Correct: Yield is critical — it's how much the future cash flows shrink in value today.
Confusing bond value with coupon payment. — Correct: Value is the PV of ALL future cash; coupon is the annual interest only.
FAQ
What is bond valuation?
Bond valuation calculates what a bond is worth today based on its future coupon payments and principal repayment, discounted at the current market yield.
How does market yield affect bond price?
Inverse relationship: higher yield = lower bond price; lower yield = higher price. This is because future cash flows are discounted at the new rate.
What is the difference between coupon and yield?
Coupon is the fixed annual interest (e.g., 5%). Yield is the market return (changes daily based on supply/demand).
What does 'trading at par' mean?
The bond is selling at exactly its face value, which happens when market yield equals the coupon rate.