Coupon Bond Formula

What is Coupon Bond Formula?

The term “coupon bondCoupon BondCoupon bonds pay fixed interest at a predetermined frequency from the bond’s issue date to the bond’s maturity or transfer date. The holder of a coupon bond receives a periodic payment of the stipulated fixed interest rate.read more” refers to bonds that pay coupons which is a nominal percentage of the par value or principal amount of the bond. The formula for calculation of the price of this bond basically uses the present value of the probable future cash flows in the form of coupon payments and the principal amount which is the amount received at maturity. The present value is computed by discounting the cash flow using yield to maturity.

Mathematically, it the price of a coupon bondPrice Of A Coupon BondThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more is represented as follows,

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For eg:
Source: Coupon Bond Formula (wallstreetmojo.com)

where

• C = Periodic coupon payment,
• P = Par value of bond,
• YTM = Yield to maturityYTM = Yield To MaturityYield to Maturity refers to the expected returns an investor anticipates after keeping the bond intact till the maturity date. In other words, a bond's expected returns after making all the payments on time throughout the life of a bond.read more
• n = No. of periods till maturity

Calculation of the Coupon Bond (Step by Step)

Examples

Example #1

Let us take an example of bonds issued by company XYZ Ltd that pays coupons annually. The company plans to issue 5,000 such bonds, and each bond has a par value of $1,000 with a coupon rate of 7%, and it is to mature in 15 years. The effective yieldEffective YieldEffective yield is a yearly rate of return at a periodic interest rate proclaimed to be one of the effective measures of an equity holder's return as it takes compounding into its due consideration, unlike the nominal yield method.read more to maturity is 9%. Determine the price of each bond and the money to be raised by XYZ Ltd through this bond issue.

Below is given data for the calculation of the coupon bond of XYZ Ltd.

The price of each bond is calculated using the below formula as,

Therefore, calculation of the Coupon Bond will be as follows,

So it will be –

= $838.79

Therefore, each bond will be priced at $838.79 and said to be traded at a discount (bond price lower than par value) because the coupon rateCoupon RateThe coupon rate is the ROI (rate of interest) paid on the bond's face value by the bond's issuers. It determines the repayment amount made by GIS (guaranteed income security). Coupon Rate = Annualized Interest Payment / Par Value of Bond * 100%read more is lower than the YTM. XYZ Ltd will be able to raise $4,193,950 (= 5,000 * $838.79).

Example #2

Let us take an example of bonds issued by company ABC Ltd that pays semi-annual coupons. Each bond has a par value of $1,000 with a coupon rate of 8%, and it is to mature in 5 years. The effective yield to maturity is 7%. Determine the price of each C bond issued by ABC Ltd.

Below is given data for the calculation of the coupon bond of ABC Ltd.

Therefore, the price of each bond can be calculated using the below formula as,

Therefore, calculation of the Coupon Bond will be as follows,

So it will be –

= $1,041.58

Therefore, each bond will be priced at $1,041.58 and said to be traded at a premium (bond price higher than par value) because the coupon rate is higher than the YTM.

Relevance and Uses

The concept of pricing of this kind of bond is very important from the perspective of an investor because bonds are an indispensable part of the capital markets. The purchaser of a bond receives these coupon payments during the period between the issuance of the bond and the maturity of the bond. In the bond market, bonds with higher coupon rates are considered to be more attractive for investors because they offer higher yields.

Further, bonds trading at a value higher than their par value is said to be traded at a premium, while the bonds trading at a value lower than their par value is said to be traded at a discount. Nowadays, these bonds are quite uncommon because most recent bonds are not issued in coupon or certificate form. Rather the bondsThe BondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually.read more are issued electronically.

Recommended Articles

This has been a guide to Coupon Bond Formula. Here we discuss how to calculate the Price of a Coupon Bond along with the examples and downloadable excel template. You may learn more about excel from the following articles –

• Par Value of Share Formula
• Zero-Coupon Bond
• Bond Pricing Formula Calculation
• Examples of Duration Formula