How much is a bond worth?

Most Bonds have a face or par value, which is what the bond will pay back at the end of the term (maturity date). The face value can be different for different Bonds, anywhere from $1 to $1,000,000, traditionally however, they are quoted as if the Bond is worth $100, even if the single bond is worth $1000 or more. The reason for this is to simplify the trading between the financial institutions as they exchange millions of dollars in Bonds.

The Bond also has a regular interest payment over the life of the bond this will give it a certain expected return. This expected return can impact the price an investor is willing to pay to purchase that Bond.

This is referred to as ‘yield to maturity‘ and is the total expected return from the bond to maturity, taking into account what price was paid for it when purchased.

For example, if a bond is paying 5%, will mature in 1 year and you pay the face value of $100, the yield to maturity is 5%. If, however you buy the bond at less than the face value, referred to as a discount, then the yield to maturity would be higher as you are earning 5% on the face value, not on what you paid for it. If you purchased the bond for $95 for example, you would in effect earn an additional $5 at the maturity date and this would adjust the yield to maturity accordingly. If you pay more than the face value, referred to as a premium, then your yield to maturity would be less as you take into account the extra money paid for the Bond. For example, paying $105 for the Bond above, it would cost you one coupon payment of $5.

Bonds have different coupon payment frequencies.

While the percentage return might be the same, the number of times the bond pay interest per year might be different.

So, one bond with a coupon of 8% might pay twice a year; 4% every six months, another might pay 2% interest every quarter. The overall amount they return is the same, but the frequency is different and this can be used to spread your income.

There are also many other aspects which can impact the pricing of the bond such as credit quality, supply and demand, inflation and liquidity. There are various kinds of Bonds that offer different risk profiles and differences of the issuer such as government bonds, mortgage bonds and corporate bonds which cover a variety of industry and sectors.

All of those factors go into evaluating what a bond is worth, while there is a fixed point (the face value plus the interest repayments) the price at which it is anchored to, it is clear the value a Bond has, plus or minus minor adjustments which are directly attributable to these factors.

While pricing a Bond can have some challenges, it is far less difficult than pricing shares, because most Bonds have a pre-arranged maturity date. At the end of the term the borrower has to pay back the face value of the bond; so while there is fluctuation in the price during the term, you know as an investor, in advance, when it gets payed back and at how much you will receive.

Please let us know if you’ve got questions!