Expert: Doug Ingram - 11/11/2009

Question
Hi, I have a question on bonds. When you figure out the Present value of a bond or the bond's price, what is this amount signifying? Is this the amount of money the bond is worth today, or is the amount you have to pay for the bond. I'm confused when you buy a bond, what you actually pay for it? For example, for stocks you pay the share price. For bonds, Would this be the par value such as $1000? And then you get this back (1000) plus the coupon payments correct, at maturity. One more question, you can sell your bond before maturity right? Its not like a CD or IRA where the money has to stay in it for so many years? Thank You!!! sorry for all the questions

Answer
The present value and price are one and the same.  It's what the bond is worth now to yield market rates on the future cash flows (maturity value and coupons).

For the par value (every $1,000 worth), the price you pay determines the return.
Price is given as cents on the dollar.

$10,000 worth of bonds with a 5% coupon priced at par (100) would yield 5% and cost you $10,000.

If you buy the bonds between coupon periods, the price includes the accrued interest.

You would have to pay $10,250 to buy the bond 6 months from maturity to yield 5%.
Par (100) plus $250 of the expected $500 plus $10,000 at maturity.

If market rates are 4%, the one year bond would cost you around $10,100.
Price of 101, because you only get $10,500 (par plus 5%) at maturity.

If market rates are 6%, you would only pay a discount (99 cents).
A $9,900 purchase would return around $10,500 at maturity.  

These are estimates to give you an idea.  The calculations are exact to return market rate given a future value (can be par or greater) and a coupon.

You can sell a bond anytime, but you might not get a great bid if you own a small size or the issue is less liquid.