Next video:
Loading the player...

Understanding bond prices and yields can help any investor in any market.

A bond is a loan. Its principal balance, or par value, is the loan amount.

A bond’s price consists of a handle, or the whole number part of a price quote, and a fraction. Corporate bonds are quoted in 1/8th increments, and government bonds are typically quoted in 1/32nds.

Suppose you buy a $100,000 two-year Treasury bond that was quoted at 99-29. Here’s how to calculate what you pay.

The bond’s handle is 99, and the 32nds are 29. Those values are converted into a percentage by dividing 29 by 32 to determine the dollar amount to be paid. The handle and the 32nds are added together to get 99.90625 percent of $100,000, or $99,906.25, which is what the bond sells for.

An investor will pay more than a bond’s par value when its coupon rate is higher than current market interest rates.

A bond’s cash flows consist of its coupon payments and its return of principal upon reaching maturity. A bond’s yield is the discount rate that makes its cash flows’ present value equal to its price. A bond with smaller coupon payments will have a smaller price, or present value.

When inflation expectations rise, bond yields and interest rates also rise, but bond prices fall. Bond prices and yields are excellent economic indicators, and the yield curve illustrates what the market thinks is coming.

  1. No results found.
Related Articles
  1. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  2. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  3. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  4. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  5. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  6. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  7. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  8. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  9. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
Trading Center