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Bond Pricing: Premium, Discount and Par

by - Thursday, May 20, 2010

For investors, bond pricing [http://www.bondview.com/] plays an important role in the yield you get when you sell the bond. Through bond valuation, you get a current, or present, value for the bond. In order to price a bond correctly, you need to know whether or not the bond includes embedded options, and if so, how those options affect the yield. Through a series of calculations, you can determine whether or not you want to buy or sell bonds based on the pricing.

When it comes to valuing bonds, par is the starting point, or the face value of the bond. If a bond matures for $1,000, that is the par. Premium and discount bonds are terms investors use to show the current selling point in relationship to the par. A premium bond is one in which the par value is lower than the bond's price. Investors often pay more for bonds selling at a premium because the bonds historically return a positive yield. For example, a bond with a par value of $1,000 selling for $850 indicates a potential return of $150 at the time of maturity, making it a premium bond. A discount bond occurs when the bond sells for more than its value. It indicates a potential loss at the time of maturity.

While you may find it easy to determine which bonds you want to buy or sell, keep in mind other factors affect bond pricing. These can include the embedded options, the security of the bond, and the cash flow for it. Working with an online bond pricing company can provide you with current prices, as well as other investment tools. Take advantage of online portfolios and research tools that will help you keep track of your investments, the last trade and the spread for bonds.

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