Bond Prices and Yields
Many factors can affect the price at which a municipal bond may be bought or sold. Under certain circumstances, a trade price or yield may reflect additional considerations unique to the specific market sector, market participant or circumstances of a particular trade beyond the precise market value of the security at the time of trade. Generally, there are five key bond price components: par value, coupon rate, maturity date, market price and the credit rating of the bond.
The par value, or face value, is the price you pay for the bond at issue. It is also the price the bond issuer will pay you at the bond maturity date.
Coupon rate, of a fixed-rate bond indicates the amount of interest payable on a bond calculated as a percentage of the bond's principal amount. Coupons are the interest payments you receive on a regular basis. Your coupon payments are equal to the bond par value times the coupon rate divided by the frequency of the coupons. Thus, a $10,000 fixed-rate bond paying interest at 5 percent would pay $500 in interest each year, usually payable in equal $250 semi-annual payments ($500/$10,000 = 5 percent). This amount does not change, regardless of the dollar price at which the bond may be sold.
The date at which the bond is redeemed by the issuer at the original par value. Coupon payments are received until the maturity date, at which time the amount originally paid for the bond will be paid back.
Yield to Maturity
The equivalent annual interest rate earned from payments of principal and interest, with interest compounded semi-annually at the stated yield, if a bond remains outstanding until its maturity date. Yield to maturity is considered a long-term bond yield expressed as an annual rate. The yield to maturity takes into account the bond current market price, par value, coupon interest rate and time to maturity. It is also assumed that all payments of principal and interest are reinvested at the same rate as the bond current yield.
Because bonds are traded in the marketplace, a bond market price must be determined when an investor wishes to purchase a bond that has already been issued. The market price is equal to the discounted value of the remaining coupon payments, plus the discounted value of the maturity value, using as a discount factor the desired yield to maturity of the purchaser.
The credit rating of an issuer bond is an evaluation or assessment that rating agencies such as Standard & Poor's, Fitch Ratings, Kroll Bond Ratings and Moody's assign to a security to indicate likelihood that an investor will receive principal and interest payments from the issuer. While the rating is a valuable guide, other aspects that affect credit quality include credit enhancement or guarantee and the credit of the bond insurer.