How bond prices work
A bond pays a fixed coupon, usually twice a year, and repays its face value at maturity. Its price is the present value of all those payments, discounted at the current market yield. When market yields rise above the coupon rate, the bond's price falls below face value (a discount); when yields fall below the coupon, the price rises above face value (a premium).
Key bond numbers
- Coupon rate – the yearly interest as a percentage of face value. A $1,000 bond with a 4.5% coupon pays $45 a year.
- Current yield – the yearly coupon divided by the price you pay.
- Yield to maturity (YTM) – the total yearly return if you buy at today's price, collect every coupon and hold to maturity. Enter a price to find it.
Frequently asked questions
Why do bond prices fall when interest rates rise?
New bonds pay the higher rate, so older bonds with lower coupons must sell for less to offer buyers the same yield.
Are Treasury bonds taxed?
Interest on U.S. Treasury securities is subject to federal income tax but exempt from state and local income taxes. Most municipal bond interest is exempt from federal tax.
What is accrued interest?
When you buy a bond between coupon dates, you pay the seller the interest earned since the last coupon. This calculator shows the price on a coupon date, without accrued interest.