What is this bond really worth?
Enter the coupon, maturity and today's market rate and see the fair price of the bond, whether it trades at a premium or a discount, its current yield, and every coupon you would collect between now and maturity.
The bond
Price falls when the market rate climbs above the coupon rate, and rises when it drops below. Set the market rate equal to the coupon and the bond sits right at par.
Premium, par or discount?
Price vs the market rate
The inverse price-yield relationship
Return scorecard
Cash flows to maturity
Each period pays a coupon; the final period also returns the face value. Present value discounts each payment back to today at the market rate.
| Period | Coupon | Face repaid | Total cash flow | Present value |
|---|
Bond investing, explained
How Bond Prices Are Calculated
Bond prices are determined by discounting all future cash flows, coupon payments and the face value at maturity, back to the present using the prevailing market interest rate. When the market rate equals the coupon rate, the bond trades at par (face value). If the market rate rises above the coupon rate, the bond trades at a discount; if it falls below, the bond trades at a premium. This inverse relationship between interest rates and bond prices is the most fundamental concept in fixed-income investing.
Coupon Rate vs Yield to Maturity
The coupon rate is the fixed annual interest rate printed on the bond when it is issued, expressed as a percentage of face value. Yield to maturity (YTM), on the other hand, reflects the total annualized return an investor can expect if the bond is held until it matures and all payments are reinvested at the same rate. YTM accounts for the purchase price, coupon payments, and any gain or loss at maturity, making it a more comprehensive measure of a bond's true return than the coupon rate alone.
How Interest Rates Affect Bond Prices
When the Federal Reserve raises interest rates, newly issued bonds offer higher coupon payments, making existing lower-coupon bonds less attractive and driving their prices down. Conversely, when rates fall, older bonds with higher coupons become more desirable and their prices rise. Longer-term bonds are more sensitive to rate changes than shorter-term bonds, a concept known as duration risk. Understanding this relationship is essential for managing a bond portfolio in any interest rate environment.
Types of Bonds and Their Risk Profiles
U.S. Treasury bonds are backed by the full faith and credit of the federal government and are considered virtually risk-free, making them the benchmark for all other fixed-income securities. Municipal bonds, issued by state and local governments, often provide tax-exempt interest income and carry moderate credit risk. Corporate bonds offer higher yields to compensate for greater default risk, with investment-grade bonds (rated BBB or higher) being significantly safer than high-yield or "junk" bonds. Diversifying across bond types helps investors balance income, risk, and tax efficiency.
Common questions
How is the price of a bond calculated?
A bond's price equals the present value of all future cash flows: the sum of discounted coupon payments plus the discounted face value. When market rates are below the coupon rate, the bond trades at a premium (above face value). When market rates are above the coupon rate, it trades at a discount.
What happens to bond prices when interest rates rise?
Bond prices and interest rates move inversely. When rates rise, existing bonds with lower coupon rates become less attractive, so their prices fall. A 1% rate increase can drop a 10-year bond's price by about 7%-8%. Longer-maturity bonds are more sensitive to rate changes.
What is the difference between coupon rate and yield to maturity?
The coupon rate is the fixed annual interest rate stated on the bond (e.g., 5% of $1,000 = $50/year). YTM is the total return you earn if you buy the bond at its current price and hold it to maturity. If you buy a bond at a discount, YTM is higher than the coupon rate.
What is current yield?
Current yield = annual coupon payment / current bond price. If a bond pays $50/year and is priced at $1,081, its current yield is $50/$1,081 = 4.63%. Current yield ignores the capital gain or loss at maturity, so it is less comprehensive than YTM.
Estimates for planning only. Real bond prices reflect credit quality, accrued interest, call features, liquidity, taxes and reinvestment assumptions. This model assumes a flat market rate and coupons reinvested at that rate. Verify every figure before you trade.