Course 103: Buying Bonds
Bond Pricing Terminology
In this course
1 Introduction
2 Things to Consider When Buying Bonds
3 How to Buy Bonds
4 Bond Pricing Terminology
5 Bond Trading Transaction Costs
6 Buying Bonds Indirectly
7 Doing Your Homework Before Buying Bonds

There are many things to consider when judging a bond's market value. Understanding the various factors that impact bond prices can help you track how your bonds change in value, and when the time is right to buy or sell.

The face value of a bond is known as its par. A bond's par is its price when it is issued, which is the same price that will be repaid when the bond matures.

A bond's coupon rate is the annual percentage rate that will be paid to the owner of the bond, based on the bond's original face value. A bond with a coupon rate of 5% pays 5% of the bond's face value each year. Bond interest is usually paid twice a year.

Here are a few more pricing tips:

  • You can sell your bond on the secondary market before it reaches maturity. The price you get for the bond before it matures is known as its market price.
  • When the price of a bond goes above its face value, it is said to be a premium bond.
  • When the price is below its face value, it is known as a discount bond.

When you buy a bond on the secondary market, you are probably going to pay a price above or below the par of the bond. This will affect your yield-to-maturity, a calculation based on the bond's original purchase price, redemption value, time to maturity, coupon rate, and the time between interest payments. For example, if you buy a bond and then sell it after interest rates have risen, you will get a lower price for the bond than what you originally paid for it. The second buyer will get a higher yield than you because he or she paid less for the bond, but the buyer will still get its full par value when it matures.

Bonds that are traded on the secondary market can have prices that are quite different from the prices at which they were originally issued. Traders look at a number of factors when assessing the market prices of bonds.

Next: Bond Trading Transaction Costs >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.