What is a Bond?

A bond is a fixed - income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

When you purchase a bond from the bond issuer, you are essentially making a loan to the bond issuer. As the bond price is the amount of money investors pay for acquiring the bond, it is one of the most important metrics in valuing the bond.

How to Calculate Bond Price?

Bond price is calculated as the present value of the cash flow generated by the bond, namely the coupon payment throughout the life of the bond and the principal payment, or the balloon payment, at the end of the bond's life.

In our calculator, if you enter $1,000 as Face value, 5% as the annual coupon rate, semi - annually as the coupon frequency, 5 years as the years to maturity or bond life, 6% as the yield to maturity or YTM, we can use the following equation and plug in the numbers to calculate bond value or price.