Determining Revenue from Bond Sales: A Step-by-Step Guide
Understanding the bond market can be perplexing for investors, especially when it comes to determining the proceeds from selling a bond. While quoted bond prices serve as a starting point, there are additional factors to consider.
Proceeds at Maturity
Proceeds from a Bond at Maturity
In certain situations, the 'sale' of a bond transpires at maturity, when the issuing company redeems it. This circumstance is relatively straightforward, with proceeds comprising two parts: the final interest payment and the maturity payment.
The final interest payment is derived by multiplying the bond's par value by the stated coupon rate, usually split into two installments for semi-annual payments. The maturity payment is usually the bond's par value. For instance, a $1,000 bond with a 5% coupon rate would yield $1,025 at maturity, combining the last semi-annual interest payment ($25) with the par value ($1,000).
Proceeds before Maturity
Proceeds from Sales of Bonds before Maturity
Selling a bond prior to maturity introduces complexity. You'll still receive an interest and principal component, but the interest will only cover the proportion of the period that has elapsed since the last regular interest payment, and the principal will reflect the bond's current price, which may differ significantly from its par value.
Consider a 5% bond with a par value of $1,000, a coupon rate, and a price skyrocketing to $1,100 due to a market-wide decline in interest rates, with three months having passed since its last semi-annual interest payment.
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Matters can get intricate, but focusing on the bond's price and the elapsed time since the last interest payment will help you calculate proceeds from a bond sale.
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In situations where a bond reaches maturity, the issuing company redeems it, resulting in proceeds comprising the final interest payment and the maturity payment, which is typically the bond's par value. On the other hand, selling a bond before maturity introduces complexity, as the proceeds will include the bond's current price and an interest payment proportionate to the time elapsed since the last interest payment. Properly considering these factors can help investors calculate their proceeds from bond sales.
When investing in bonds, it's essential to understand the relationship between the bond's price, the coupon rate, and the elapsed time since the last interest payment to accurately calculate the proceeds from selling before maturity.
