Market value of a bond
Tuesday, 10 June 2008 05:35

This is an example for the bond calculator. See also the usage description and the Yield to Maturity example..

Suppose the government issues a bond on January 15, 2000, with a nominal value of \$1000 paying 3% interest each half year. The bond is repaid on January 15, 2015. On May 2, 2008, the yield to maturity of a similar bond is 5.94%. The buyer of the bond has to pay a part of the current coupon to the seller, on top of the market price. The question is how to compute the expected market value on May 2, 2008 of this bond.

In order to compute the market value enter the following values into the fields of the bond calculator:

Field nameValueRemark
Nominale interest (% per year)6Three percent per half year makes 6 percent per year.
Coupon period6 monthsInterest will be payed every 6 months.
Date computation2008-05-02Enter the date on which the Yield to Maturity will be computed. The format is YYYY-MM-DD.
Maturity date2015-01-15The date format is again YYYY-MM-DD. From the coupon period and the maturity date the coupon dates are computed.
Interest in advance or afterwardsafterwardsAlmost always interest is paid at the end of each coupon period.
Nominal value1000Principal amount paid back at the maturity date.
Compute Yield to Maturity or ValueYieldSelect the type of computation
Yield to maturity5.94Equivalent interest rate for this bond.

The result of the calculation is a dirty price of \$1025.72, including a the first part of the current coupon of \$17.63. So the bond will be traded at about \$1008.

The Modified Duration is 5.22. This means that the clean price of this bond goes down 5.22 times as fast as the interest increases. So if the yield to maturity of similar bonds goes up by 1% then the price of the bond on the stock market will go down by about 5%.