What is Dollar Price?
The dollar price is a phrase that refers to bond pricing. Dollar price is the amount of money an investor pays to purchase the bond. Since a bond is a loan, the amount of the bond is always the amount that an investor puts (when the bond is originated) in to purchase the interest payments the bond will provide. This amount is the par value. However if that bond is sold to someone else after origination but before maturity then then the price of the bond will fluctuate and be quoted as a percentage of par. Dollar price is one of two ways that a bond price can be quoted, the other is by yield.
- Dollar Price is the term for the price of a bond.
- It is expressed as a percentage of the par value of a bond.
- Once the bond is offered, this price fluctuates in the secondary market.
Understanding Dollar Price
Bonds are used by companies, municipalities, states, and U.S. and foreign governments to finance a variety of projects and activities. For example, a municipal government may issue bonds to fund the construction of a school. A corporation, on the other hand, might issue a bond to expand its business into a new territory.
The price of a bond can be quoted in one of two ways by the various exchanges: by dollar price and by yield. Frequently, providers of bond quotes publish both the dollar price and yield concurrently. A bond's yield indicates the annual return until the bond matures.
For example, if an investor purchases a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). The dollar price, on the other hand, represents a percentage of the bond's principal balance, also called its par value. Because a bond is a loan (made to a corporation, municipality or other government entity) the par value is the basic loan amount. The value of the bond could be considered the par value plus all the expected payments that should be paid over the life of the bond.
So if the buyer of a bond decides they want to sell a bond they had previously purchased, they look to the market to see the going rate that they can sell the bond for.
For example, if the price of a bond is $1,120 and the par value of the bond is $1,000, the bond would be quoted at 112% in dollar terms. If the investor had purchased this bond at par, then at this new quote, a seller could make $120 profit from the sale of the bond, in addition to whatever interest they had collected on the bond to that point. A bond that is selling at par (at its face value) would be quoted at 100 in terms of dollar price. A bond that is trading at a premium will have a price greater than 100; a bond that is traded at a discount will have a price that is less than 100.
As the price of a bond increases, its yield decreases. Conversely, as bond prices decrease, yields increase. In other words, the price of the bond and its yield are inversely related.