The market value of a bond has two parts: The value of the amount of the bond itself, or its face value, and the value of the interest you would receive if you held on to the bond until it matures. The total of these two amounts is a bond’s market value. To find out what your bond's market value is, you can use a complex formula involving at least 10 calculations, or you can use a couple of widely available accounting tools to find a quick answer.
What You’ll Need
To determine a bond’s market value, you’ll need its face value, the number of interest payments due to you before its maturity date and the percentage of interest it pays. Let’s say that a bond’s face value is $1,000, it has five years to go before it matures and its stated interest rate is 10 percent, which is paid annually. So, you have five more interest payments coming.
You’ll also need to know what the current market interest rate is on your bond or a similar bond. Similar means the same maturity date, stated interest rate and credit rating as your bond. You can do a quick internet search for the name or type of bond you have. For example, “Texas Water Development Board Revenue St Water Implementation Fund” or “municipal bonds.” We’re going to use 8 percent as the current market interest rate.
Present Value of 1 Table
To find the present lump sum value of our $1,000 bond, we are going to use a present value of 1 table. A quick internet search will yield a long list of this common accounting tool. We locate our 10 percent interest rate in the top row of the table and the five interest payments remaining to our bond’s maturity in the right-hand column. The cell where these two factors meet is our bond’s present value factor, 0.6209. We multiply that factor by the bond’s $1,000 face value. The result is $620.90. This is our bond’s present lump sum value.
Present Value of an Ordinary Annuity Table
In addition to a bond’s lump sum value, there’s value in the interest payments that would be received if the bond is kept to maturity. That $1,000 bond with the 10 percent interest rate would pay $100 a year, or a total of $500 in interest from now until it matures in five years. So, in addition to the bond’s present lump sum value, we need to know the current value of that $500 in interest.
Find a present value of an ordinary annuity table to determine the present value of those interest payments. This time, we’re going to use the current interest rate for our bond or a similar bond, which we’ve said is 8 percent. Find 8 percent in the top row of the table. Find five years in the right-hand column. The cell where these numbers meet tells us that the present value of an ordinary annuity factor is 3.9927. The ordinary annuity table has already accounted for the fact that five payments will be made, so we only need to multiply the factor by one interest payment. One $100 interest payment multiplied by 3.9927 is $399.27.
To Hold or to Sell
We’re almost there! Add the bond’s present lump sum value of $620.90 and the present value of its interest payments, $399.27, for a total of $1,020.17. This is the current market value of the bond. Now we have what we need to decide whether to hold on to it or sell it.
Items you will need
- Annuity table
- Accounting in Focus: Present Value and Bond Issue Prices
- Accounting Tools: How to Calculate the Present Value of a Bond
- Accounting Tools: Present Value of 1 Table
- Accounting Tools: Present Value of an Ordinary Annuity Table
- FinancialManagementPro: Bond Valuation
- Investopedia: 4 Basic Things to Know About Bonds
- MarketWatch: Bonds: Buy, Sell or Hold?
- MunicipalBonds.com: Issue 882854VX7
- Jupiterimages/Goodshoot/Getty Images
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- How to Calculate Accrued Interest on Bonds Purchased
- Relationship Between Bond Price & Yield to Maturity
- Annual vs. Semi-annual Bond Analysis
- Do Bonds Compound Interest?
- How to Calculate the Price of a Bond With Semiannual Coupon Interest Payments
- Yield to Maturity Vs. Spot Rate
- Do Bonds Pay a Variable Interest Rate Monthly?