Anytime you buy a bond, you loan money to the corporation or government that issued it. Each bond has a face value, which is the sum the company or government must give you to pay back the money it borrowed. If you hold the bond until the date it must be paid off (called the maturity), you receive the face value. However, determining the market price of a bond is more complicated than just looking up its face value. Investors buy bonds for the interest income they produce and trade the bonds in an effort to get the best return on their investment. Consequently, during the bond’s lifetime (usually years or decades) the price constantly changes.
Find out the bond’s face value. Most corporate bonds have face values of $1,000. Municipal bonds (those issued by local or state governments) come in $1,000 or $5,000 denominations. U.S. Treasury bonds usually range from $1,000 to $10,000 or more. You will find the face value stated on the bond.
Locate a current price quote for the bond. Bond prices are reported as percentages of face value, not in dollars and cents. Major bond issues are listed in newspapers like the Wall Street Journal. Most bonds are not listed. There are more than 1.5 million municipal bond issues, plus many more Treasury and corporate bonds. It’s simply not possible to create a comprehensive listing. To find bond price quotes, try online services like Yahoo Finance's Bond Center and InvestingInBonds.com's Municipal Market At-a-Glance (see Resources 1 and 2). If you still can’t find a quote, ask your broker for help.
Multiply the percentage bond price quote by the bond’s face value to find the market price of the bond. Suppose you want to know the market price of a $1,000 bond. If the quote is for 95.25, multiply $1,000 by 95.25 percent. The market price is $952.50.
- Bond price changes are driven by investor demand, which is, in turn, based mainly on a bond’s interest rate compared to prevailing market interest rates and the degree of risk associated with the individual bond.
- If prevailing interest rates increase, a bond’s fixed interest becomes less attractive. The price is likely to fall. Conversely, a drop in interest rates may result in an increase in bond prices.
- If a bond’s rating from rating services like Moody’s or Fitch Ratings is lowered, reflecting more risk, the bond price may drop.