How to Calculate Coupon Bonds
Bonds are a type of debt investment where the investor loans money to a corporation or organization in exchange for payments. Coupon bonds, also known as "bearer bonds," have coupons attached to them representing semiannual interest payments due to the bond holder. Investors purchase coupon bonds for less than the maturity value. You can calculate the bond's present value market price by calculating the interest and coupon payments over time.
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Instructions
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Write down the formula to calculate bond price: BP = C * [1 - [1/(1+i)^n]]/i + [M/(1+i)^n], where C is the coupon payment, n is the number of payments, M is the maturity face value and i is the interest rate.
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Collect the coupon bond information. Assume you have a coupon bond with a maturity value of $1,000 paying an 8 percent coupon rate semiannually with a 10 percent interest rate over 10 years.
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Use the information to define your variables. Since the bond will pay semiannually over 10 years, you will have 20 payments (n = 20). To arrive at a dollar value, divide 8 percent by the two payments per year (4 percent), which is $40 per $1,000 bond (C = 40). Convert interest into semiannual decimal form (i = 0.05).
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Fill in your variables in the formula.
BP = 40 * [1 - [1/(1+0.05)^20]]/0.05 + [1000/(1+0.05)^20]
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Calculate.
BP = 40 * [1 - [1/(1.05)^20]]/0.05 + [1000/(1.05)^20]
BP = 40 * [1 - [1/2.65329]]/0.05 + [1000/2.65329]
BP = 40 * [1 - 0.37689]/0.05 + (376.82)
BP = 40 * [0.62311]/0.05 + (376.82)
BP = 40 * 12.4622 + (376.82)
BP = 875.31The current coupon bond price is $875.31.
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