Strictly speaking, dividing the gain into equal payments doesn't match up with the way that compound returns work, so if you run the situation through a financial calculator, you'll get a slightly different answer. In the case above, the actual semi-annual bond yield is 2. Nevertheless, you can see that the quick equal-payment method gets you fairly close to the real answer.
Finally, keep one thing in mind: in most cases, bond yields are expressed in terms of annual yield, even though payments are made semi-annually.
Pricing bonds with different cash flows and compounding frequencies
Regardless of how they're stated, though, knowing the bond yield can help you compare different bonds to find the best choices for your financial needs. For many investment options, both stocks and bond funds, you'll need a brokerage account. The Fool has a helpful section that will let you compare various brokers' offerings , and find one that's right for you.
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An Introduction to Bonds, Bond Valuation & Bond Pricing
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How to Invest. Learn How to Invest. Coupon rate: Some bonds have an interest rate, also known as the coupon rate, which is paid to bondholders semi-annually. The coupon rate is the fixed return that an investor earns periodically until it matures. Maturity date: All bonds have maturity dates , some short-term, others long-term. When the bond matures, the bond issuer repays the investor the full face value of the bond.
The face value is not necessarily the invested principal or purchase price of the bond.
Current Price: Depending on the level of interest rate in the environment, the investor may purchase a bond at par, below par, or above par. For example, if interest rates increase, the value of a bond will decrease since the coupon rate will be lower than the interest rate in the economy. When this occurs, the bond will trade at a discount , that is, below par. However, the bondholder will be paid the full face value of the bond at maturity even though he purchased it for less than the par value.
Key Takeaways Bond valuation is a way to determine the theoretical fair value or par value of a particular bond. It involves calculating the present value of a bond's expected future coupon payments, or cash flow, and the bond's value upon maturity, or face value. As a bond's par value and interest payments are set, bond valuation helps investors figure out what rate of return would make a bond investment worth the cost. Following our example above, if the bond paid no coupons to investors, its value will simply be:.
Under both calculations, a coupon paying bond is more valuable than a zero-coupon bond. Compare Investment Accounts.
Semi-annual coupon bond vs Annual Coupon bond present value
The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Bond Discount Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity. Par Value Par value is the face value of a bond, or for a share, the stock value stated in the corporate charter.
It is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. Zero-Coupon Bond A zero-coupon bond is a debt security that doesn't pay interest but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. Strip Bond A strip bond is a bond where both the principal and regular coupon payments--which have been removed--are sold separately. Coupon Rate Coupon rate is the yield paid by a fixed income security, which is the annual coupon payments paid by the issuer relative to the bond's face or par value.
Partner Links. Related Articles. Fixed Income Essentials When is a bond's coupon rate and yield to maturity the same? Fixed Income Essentials Yield to Maturity vs. Coupon Rate: What's the Difference?