DEFINITION of Dollar Price
The dollar price is the percentage of par, or face value, at which a bond is quoted. Dollar price is one of two ways that a bond price can be quoted, the other is by yield.
BREAKING DOWN 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. A bond is a loan (made to a corporate or government entity) and the par value is the loan amount.
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. 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.