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What is a bond pricing formula?

The bond pricing formula involves calculating the present value of the anticipated future cash flows, including coupon payments and the par value, or the amount redeemed when the bond matures. The interest rate discounting future cash flows is called the “yield to maturity (YTM).

How do you determine a bond's current price?

Finding the present value of each of those six cash flows with an interest rate of 12% will determine what the bond's current price should be. Bond yields are quoted as a bond equivalent yield, which adjusts for the bond coupon paid in two semi-annual payments.

How do you calculate the fair value of a bond?

The theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate. The discount rate used is the yield to maturity, which is the rate of return that an investor will get if they reinvested every coupon payment from the bond at a fixed interest rate until the bond matures.

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