1) What makes up the price of a bond? Think cash flow

1. Price of Bond - Cash Flow

A debt instrument which provide continuous income to the investors in the form of coupon is called a bond. The price of bond is determined by the face value, present value of bond in the market, future coupon payment, cash flow of firm issuing bond and value on its maturity.

The price of bond will equals the present value of expected future cash flows.

2. Relationship between Bond Price and Market Rate

There is an inverse relationship followed by the bond price and market interest rates. Bond price will decrease with the increase in the cost of borrowing money and vice versa.

The bonds will pay a fixed interest rate upon its life time. But, the market rate will vary with the changing market environment.

3. 5 Entries to Time Value Solver work with Bonds

N - It is the number of compounding period in which the bond is valid.

I / y - It is the yield rate per payment interval.

PV - It is the present value of a bond.

PMT - It is the periodic interest payment made to the bondholders.

FV - It is the face value or par value of a bond.It is the amount paid at the maturity time to the bondholders by the issuing company.

4. Difference between Coupon Rate and Market Rate

Coupon rate is the rate used by the bond issuing company to calculate interest rate on bonds. Whereas Market rate is the rate which have similar risk in paying interest like other bonds in the market.

5. Cash Flows for a Bond

There are somd cash flows to measure the price of a bond. They are annual coupon bonds and semi- annual coupon bonds.

6. Volatility difference between long term bond and short term bond

The long term bond has higher risk and higher volatility. If the bond rate falls, one can purchase a long term bond as it has higher price volatility. They have high yields.

The short term bond has lower risk and lower volatility. If the bond rate raises, one can purchase a short term bond as it has higher risk volatility. They have low yields.

7. Bond Priced at $1000

Some companies sells the bond for $1000 when the current price is greater than the face value of a bond. It is called premium.

8. Premium and Discount in Bonds

When the current price of bond is greater than face value of bond, it is called premium. The issuing company can earn more through premium bonds.

When the curren price of bond is smaller than face value of bond, it is called discount. The issuing company can earn less from discounting bonds.

9. Call Provision on Bond

A call provision is a provision on bonds which make the issuer to repurchase the bond and retire the bonds. Bonds with call provisions will make more earnings to the investors. A call provision can be influenced by the current price of bond.

10. Calling of Bonds by firms

When the current interest rate of bonds fall in the market, the issuer can call for bonds.

11. Value for a bond

The influence of value for a bond can be made by supply and demand of market, credit quality and maturity period of bond.

12. Relation between Discount rates and Bond rate

The bond rate is the fixed rate allowed by the issuing company. Discount rate is the rate which is issued by the company when the current market price of bond is lower than face value. Both rates are fixed by the bond issuers.

13. Change in Bond Price over time

The bond price will change due to changes in supply and demand in the financial market.

The cash flow of the firm can also change the price of a bond.

14. Good time to buy a bond

When the investor avoids risk, he can buy a bond when it has low interest rate in the market. When the investor needs high return and risk- free, he can buy a bond when it has high interest rate in the market.

15. Yield on a Bond

The yield on a bond can be attained by higher risk and market interest rate.

16. YTM of a Bond

YTM stands for Yield To Maturity. It is the total return collected on a bond upto its maturity period. It is a long term yield to the investors.