Dollar Price
What Is the Dollar Price?
The dollar price, in bond pricing, alludes to the amount of money an investor pays to purchase the bond. At issuance, the dollar price is the bond's face or par value.
Assuming that bond is subsequently sold to another person on the secondary market before maturity then the price of the bond will probably contrast from its face value and be quoted as a percentage of par. The dollar price is one of two different ways that a bond price can be quoted, the other is by its yield.
Understanding the Dollar Price
Bonds are utilized by companies, municipalities, states, and the U.S. what's more, foreign governments to finance different tasks and activities. For instance, a municipal government might issue bonds to fund the construction of a school. A corporation, then again, could issue a bond to grow its business into new domain.
The price of a bond can be quoted in one of two ways by the different exchanges: by dollar price and by yield. Every now and again, suppliers of bond provides distribute both the dollar cost estimate and yield simultaneously. A bond's yield shows the annual return until the bond develops.
A bond that is selling at par (at its face value) would be quoted at 100 in terms of dollar price. A bond that is trading at a premium will have a price greater than 100; a bond that is traded at a discount will have a price that is under 100.
As the price of a bond increases, its yield diminishes. On the other hand, as bond prices decline, yields increase. At the end of the day, the price of the bond and its yield are conversely related.
Bond Yield versus Dollar Price
As bonds' dollar prices increase, their yields fall — as well as the other way around. For instance, expect an investor purchases a bond that develops in five years with a 10% annual coupon rate and a face value of $1,000. Every year, the bond pays 10%, or $100, in interest. Its coupon rate is the interest partitioned by its par value.
If interest rates rise above 10%, the bond's price will fall. On the off chance that the bond's price falls below the point of the original purchase price and the investor chooses to sell it, their return on investment would be lower than they originally expected it to be. For instance, envision interest rates for comparable investments rise to 12.5%. The original bond still just makes a coupon payment of $100, which would be ugly to investors who can buy bonds that pay $125 now that interest rates are higher.
If the original bond owner has any desire to sell the bond, the price can be brought down so the coupon payments and maturity value equivalent a yield of 12%. In this case, that means the investor would drop the price of the bond to $927.90. To completely comprehend the reason why that is the value of the bond, you want to comprehend somewhat more about how the time value of money is utilized in bond pricing.
Assuming interest rates were to fall in value, the bond's price would rise on the grounds that its coupon payment is more alluring. For instance, on the off chance that interest rates tumbled to 7.5% for comparable investments, the bond seller could sell the bond for $1,101.15. The further rates fall, the higher the bond's price will rise, and the equivalent is true in reverse when interest rates rise.
Dollar Price Example
For instance, say an investor purchases a bond with a 10% coupon and $1,000 par value. At issue, the dollar price is $1,000.
Assuming the bond's market value increases to $1,120 its dollar price would be quoted at 112%. Assuming the investor were to sell, they could make $120 profit from the trade, notwithstanding anything interest they had collected on the bond to that point.
Features
- It is normally communicated as a percentage of the par value of a bond.
- As the bond trades, its dollar price changes in the secondary market.
- Dollar Price alludes to the price paid for a bond.
