Definition of Selling Price of Bond
The selling price (or the market value) of a bond is the present value of the future contractual cash amounts that are going to be received by the owner of the bond. Expressed another way, the current selling price, present value, or market value of a bond = the total of the semiannual interest payments PLUS the amount that will be received when the bond matures both discounted by the current market interest rate. The total of these two present values = the market value or selling price of the bond.
Example of Computing the Selling Price of a Bond
Assume that a 6% bond having a face value $1,000,000 that will mature in 2 years is currently offered for sale. The interest paid on the bond is $30,000 every six months. The current market interest rate for a similar bond is 8%.
The present value or current market value of this bond is:
- Interest of $30,000 paid at the end of each of 4 semiannual periods discounted by 4% per semiannual period = $108,897
- Maturity value of $1,000,000 discounted by 4% for 4 semiannual periods = $854,800
- Total present value = $108,897 + $854,800 = $963,697
The bond's current price is less than the bond's face/maturity amount of $1,000,000 because the bond is paying an interest rate that is lower than the current market interest rate.