Bond Prices

Investment in bonds can yield high return, yet while investing, it is prudent to have a clear overview on bond price, as bonds are debt instruments. Bonds are loans in the form of securities and, in general, are issued by companies, public authorities, credit, and super-national institutions.
As investing in bonds involves high risk, financial analysts study the dynamics of trading and valuing bonds .Bond prices refer to the amount in which bonds are issued, and these prices can differ considerably. The amount in which investors are willing to pay for an existing bond is known as the the bond price.

In the United States, prices and price values have a relationship with the creditworthiness of bond issuers, particularly since they have to agree to pay a specific some of money, after a certain period of time. Leading financial advisory service providers are consistently carrying out research to estimate credit stature of various issuers, and institutional investors regularly monitor their credit rating. If the rating goes downhill, it considerably affects the bond price. As these prices are volatile, they can influence performance of mutual funds that hold the bonds.
Because bond issuing firms determine prices, prospective investors should have clear insight about techniques on how to analyze them, as it can suggest future yields.

Bond valuation is the method of calculating the potential market price or “Fair price”.

The bond prices can be listed into three main categories as follows:

  • Premium bonds: the bond’s price remains higher compared to current prevailing rates.
  • Discount bonds: bonds with a discount rate less than prevailing discount rates.
  • At par bonds: priced at par value

The amount of coupon payments depends upon the price. If a purchaser sells a bond in the secondary market in the period between two interest receiving dates, the accrued interest since the last payment date should be paid to the secondary purchaser. This concept is known as “dirty price’. The price calculation is exceedingly important for an effective bond valuation. If no interest amount is paid in the market, the bond gets sold at a “clean price”.

The price of bonds may vary in different markets as follows:
Municipal
Government
Corporate
MBS/ABS

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Last Updated on : 10th July 2013