Bond Value

In: Business and Management

Submitted By oilofolay
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How do you value bonds? What factors can affect that value?

A bonds value is determined by the present value of the bond’s cash flow. The cash flow includes interest payments and the repayment of the principal. The factors that affect a bond’s price include, the par value, the market interest rate and the length of maturity, and the investor’s discount rate.

The par value of a bond means stated value or face value. A bond that is sold for less than its par value is being sold at a discount. A bond that is sold for a greater amount than its par value is being sold at a premium. Fluctuations can occur when changes take place in the market interest rate. When there’s an increase in the market interest rate the affect will create a decrease in the value of the bond and this will cause investors to require a higher return to offset the lower amount of the payments. Along with the interest rate the bond’s maturity length also affects bond price. The longer length of time it takes a bond to mature can allow for more variations in the market interest rate and the opposite can occur for less time. Another factor that can affect the value of a bond is the investor’s required rate of return and price. If an investor pays more for a bond the value increases and the opposite will happen if a lower amount is paid. The following list the reasons for a change in an investor’s rate of return:

* A perceived risk connected to the bond issuer * A perceived change in the market interest rate * A perceived change in general market…...

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