Question

How do you calculate the price of a bond after the settlement date (what's the formula)?

Answer 1

The PRICE formula in excel can be used to calculate the market price of bond per $100 face value.

Formula;

=PRICE(Settlelment, Maturity, rate, yld, redemption, frequency, [basis] )

where;

settlement = settlement date,

Maturity=maturity date on bond

rate=Annual coupon rate of the bond

frequency =no of coupons paid per year

Basis: the financial day count basis used by the bond.

There is another way where the market price is calculated by deriving the present value of the future interest payments and the redemption value by using the yield as the discount factot.

Bond Price = C1/(1+Y/k)^1 +C2/(1+Y/k)^2 +C3/(1+Y/k)^3 +..............Cn/(1+Y/k)^n +P/(1+Y/k)^kn

Where C =Interest payment for each period

n=no of years for maturity

Y =Yiled to maturity or Adjusted Market rate

k=no of coupon payments per year.

P=Par value of Bond