About this calculator
The Bond Calculatorletsyou Calculate the price of bonds traded at the coupon date.
How to use the bond calculator
To use the bond calculator follow these steps:
- Enter the Price: Input the current market price of the bond.
- Enter the Face Value: Input the bond’s nominal or par value, usually the amount paid back at maturity.
- Enter the Yield: Input the expected annual yield or required rate of return.
- Enter Time of Maturity: Specify how many years (or months) remain until the bond matures.
- Enter the Annual Coupon: Input the total interest the bond pays per year.
- Select the Coupon Frequency: Choose how often the coupon is paid (e.g., annually, semi-annually, quarterly).
- That's it
What is a Bond?
A bond is a type of debt- an issuer commits to repay a loaned sum of money along with interest at a stated rate within a given time. When you purchase a bond you are lending money to the issuer (this may be a government, a municipality or a corporation). In response the issuer is expected to pay periodic interest payments (also referred to as coupons) and to pay the principal of the bond (also referred to as the face or par value) when it is time to mature. One of the oldest and most common methods of organizations to raise capital and investor to generate relatively predictable income is a bond.
A bond is basically formed of a few things. Face value/par value is the sum that the issuer will give back on maturity. The interest paid by the owner of the bond is the coupon (it is commonly a specified sum of money or a specified percentage of the face value and is paid at a specified time (such as every year or every six months). The maturity is the date by which the principal is paid back; the maturity can be very short (months) to very long (decades). It is the market value that you pay to purchase the bond in the market, which can be more than, less than or the same as the face value, based on the interest rates, credit risk, and other market forces. Lastly, the yield is the amount the bond will give an investor; this depends on the coupon, the price paid and the time to maturity.
Not all bonds are the same. Governments issue sovereign bonds (such as U.S. Treasuries) which tend to be considered low risk since a sovereign is able to tax or print money. The municipal bonds issued by local governments commonly benefit the investors with tax benefits. Corporate bonds are corporate bonds that are issued by corporations to finance their business activities; they tend to have higher coupons, however, having a high degree of credit risk. Special types, such as zero-coupon bonds (which do not make any periodic interest payments but are sold at a severe discount, and that mature at face value), callable bonds (which can be redeemed by the issuer), convertible bonds (which can be exchanged by the holder under some circumstances), and inflation-linked bonds (whose payments are pegged to inflation) also exist.
Interest rates and credit perceptions have great influence on how bonds behave in markets. On an upturn of interest rates already issued bonds at lower coupons lose their appeal, and their market value declines; on a downsurge, already issued bonds of high coupon increase in value, and sell at premiums. The credit risk is also important: in case the investors believe that the issuer is losing the capacity to pay them, the price of the bond will decline and the yield will increase to cover the additional risk of investing in new buyers. Credit rating agencies issue letter grades (such as AAA, BBB, etc.) that give an overview of how the agency thinks there is a chance of default, but investors also perform their analysis.
Bonds are used by investors due to a number of reasons. Bonds have potential to generate stable income, maintain capital, and overall portfolio volatility since bond prices generally respond in a different way compared to stocks to economic changes. Bonds are also popular with many investors to match future obligations (such as a retirement fund to future payments), or to diversify. Bond markets serve to manage liquidity and risk to traders and institutions, and governments to fund deficits and big projects.
There are some real-life issues that are relevant to anybody trading in bonds. Price/yield has an inverse relationship: the higher the price is paid on a bond, the lower the yield will be and the other way round. A widely used measure is yield to maturity, which is a measure of the total amount one can expect to receive in case bond is held to maturity (mainly on condition that payment is paid as scheduled and coupons reinvested at the same rate). Duration and convexity are higher order measures that give an approximation of the sensitivity of a bond price to interest rate change - duration is an approximation of the percentage price change to a specific rate change, and convexity is an approximation of the percentage change to a bigger change. The effective return is also subject to taxes and other types of fees: some municipal bonds are not subject to federal (and in some cases state) tax and corporate bond interest is generally taxable.
The trade of bonds occurs in both primary (where new issues are offered to the investors) and secondary markets (where old bonds are sold and bought). Liquidity range is broad: government bonds tend to be highly liquid, whereas certain corporate or municipal issues can be thinsly traded. To retail investors, bonds may be bought directly using brokers, in mutual funds or exchange-traded funds (ETFs), which combine many bonds, or retirement and institutional accounts.
Bond vs CD
Both a bond and a Certificate of Deposit (CD) are debt instruments that enable you to lend money in order to receive some interests, however, differing in terms of who issues it, risk, and flexibility. A bond is usually issued by a corporation, a government or a municipality and it collects set interest (coupons) throughout the duration of the bond and the principal is repaid at maturity. Security Bonds can be listed in secondary markets and this implies that the price of the security can increase or decrease prior to maturity according to interest rates and credit risk. On the other hand, a CD is issued by a bank and it is normally insured to a given extent hence being less risky but earning less. The disadvantages of CDs include the fact that they are not easily sellable prior to maturity without charges and are sometime short term in duration, as opposed to bonds. Basically, both of them offer predictable income yet bonds have higher prospects of returns and flexibility in the market whilst CDs are more secure and easier.