Bond Price
IntermediateA bond price is the amount investors are willing to pay for a bond in the market. It is often quoted as a percentage of the bond's face value.
A bond's price is the present value of all its future payments, its coupons and the repayment of face value, discounted at the current market yield for similar bonds.
When market interest rates change, bond prices adjust. Suppose a bond pays a 5% coupon. If new bonds of similar quality also pay 5%, it trades at around its face value. If market rates rise to 6%, investors will only buy the older 5% bond at a lower price that gives them a 6% yield overall. A three-year bond with a 1,000 face value would then trade at about 973. If market rates fall to 4%, the same bond rises to about 1,028.
This is why bond prices and yields always move in opposite directions.
Bond prices are often quoted as a percentage of face value, so a price of 97.3 means 97.3% of face value, or 973 for a 1,000 bond. Prices also change if the issuer's credit quality changes. A company that looks more likely to default will see its bond prices fall as investors demand a higher yield.
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