How to Value Investment in Corporate Bonds
- 1). Obtain the coupon, term and maturity date to obtain the correct par value since many corporations have many bond issues out at the same time. Call your brokerage firm's bond desk or look at online resources such as MSN Money or Yahoo! Finance for the information.
- 2). Write down the formula to find the bond price: Bond Price = C *[1 -[1/(1+i)^n]]/i + [M / (1+i)^n]
"C" refers to the coupon payment, "i" refers to the interest rate, "M" is the maturity or par value and "n" refers to the number of periods left for payments. The symbol "^" stands for raising the number to the "-n" degree. - 3). Define the variables. Assume a $1,000 bond has $30 payments with a 5 percent interest rate paid twice a year for three more years. The coupon payment, C, is the $30, 0.05 is the interest rate and there are six more period payments (two payments per year for three more years).
- 4). Compute the bond price of the investment.
Bond Price = $30 *[1 -[1/ (1+0.05)^6] / 0.06] + [1000 / (1+0.05)^6]
Bond Price = $30 *[1 -[1/ (1.05)^6] / 0.06] + [1000 / (1.05)^6]
Bond Price = $30 *[1 -[1/ (1.34)] / 0.06] + [1000 / 1.34]
Bond Price = $30 *[1 - 0.746] / 0.06] + [746.26]
Bond Price = $30 *[0.253 / 0.06] + [746.26]
Bond Price = $30 *[4.228] + [746.26]
Bond Price = $126.87 + 746.26
Bond Price = $873.13
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