How to Calculate Bond Payment

Companies issue bonds to raise money for expenses.

Companies issue bonds as a method of raising money for corporate purposes without diluting the company's ownership. Bonds function very similarly to bank loans, except that investors buy the bonds. The bonds make interest-only payments over the term of the bond and then pay back the par value at maturity, which is when the bond ends. To calculate the bond payments, you need to know the bond's par value, interest rate and how often interest is paid.

Things You'll Need

• Calculator

Instructions

1. Consult the bond information to determine the par value, the number of payments per year and the annual interest rate. The par value equals the stated value of the bond, not the amount paid for the bond.

2. Divide the annual interest rate, also known as the coupon rate, by the number of times per year interest payments are made to find the periodic interest rate expressed as a percentage. For example, if a bond pays 12 percent per year and pays interest semi-annually, you would divide 12 by 2 to get 6 percent.

3. Divide the bond's periodic interest rate expressed as a percentage by 100 to convert the percentage to a rate. In this example, you would divide 6 percent by 100 to get 0.06.

4. Multiply the periodic interest rate by the par value of the bond to find the bond payment. In this example, if the par value of the bond equals $2,000, you would multiply 0.06 by $2,000 to get $120 as the bond payment.

References

• Investopedia: Bond Basics: Characteristics
• Investopedia: Advanced Bond Concepts: Pricing