Bond Calculator
Bond Basics
Bond Ratings
Related Calculators
Understanding Bonds
What is a Bond?
A bond is a fixed-income investment where you lend money to an entity (government or corporation) for a defined period at a fixed interest rate. Bonds pay regular interest (coupon) payments and return the face value at maturity.
Bond Price Formula
Bond Pricing Concepts
Premium
Price > Face Value. Occurs when coupon rate exceeds market rate.
At Par
Price = Face Value. Coupon rate equals market rate.
Discount
Price < Face Value. Occurs when coupon rate is below market rate.
Types of Yield
| Yield Type | Formula | Description |
|---|---|---|
| Coupon Yield | Coupon / Face Value | Stated interest rate on the bond |
| Current Yield | Annual Coupon / Market Price | Income relative to current price |
| Yield to Maturity | IRR of all cash flows | Total return if held to maturity |
Interest Rate Risk
Key Relationship: Bond prices and interest rates move inversely.
- When rates rise → bond prices fall
- When rates fall → bond prices rise
- Longer maturities = more price sensitivity
- Lower coupons = more price sensitivity
Types of Bonds
Government Bonds
- Treasury bills (T-bills): <1 year
- Treasury notes: 2-10 years
- Treasury bonds: 20-30 years
- Municipal bonds: state/local
Corporate Bonds
- Investment grade: BBB/Baa or higher
- High yield: Below BBB/Baa
- Convertible: Can convert to stock
- Callable: Issuer can redeem early
Bond Investment Tips
- Diversify across maturities (bond ladder strategy)
- Consider tax implications (municipal vs. corporate)
- Match bond maturities to when you need funds
- Higher yield usually means higher risk
- Consider bond funds for easy diversification
Frequently Asked Questions
What is yield to maturity (YTM)?
Yield to maturity is the total return you'll receive if you hold a bond until it matures, expressed as an annual rate. It accounts for the bond's current price, face value, coupon payments, and time to maturity. YTM is considered the most accurate measure of a bond's return because it includes both interest income and any capital gain or loss from buying at a premium or discount.
Why do bond prices fall when interest rates rise?
Bond prices and interest rates have an inverse relationship. When new bonds are issued at higher rates, existing bonds with lower coupon rates become less attractive, so their prices drop to offer competitive yields. Conversely, when rates fall, existing bonds with higher coupons become more valuable. This is called interest rate risk, and it affects longer-term bonds more than shorter-term ones.
What is the difference between current yield and coupon yield?
Coupon yield is the annual interest rate stated on the bond (coupon payment divided by face value), which stays constant. Current yield is the annual interest divided by the current market price, which fluctuates. If you buy a bond at par, they're equal. If you buy at a discount, current yield is higher than coupon yield; at a premium, it's lower.
Are bonds a safe investment?
Bonds are generally considered safer than stocks but carry several risks: interest rate risk (prices fall when rates rise), credit risk (issuer may default), and inflation risk (returns may not keep pace with inflation). Government bonds are safest, while high-yield 'junk' bonds carry significant default risk. Bond safety also depends on holding period - short-term volatility exists even for safe bonds.