🔴 Bond Valuation Explained and How to Value a Bond

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What is a Bond?

Basically, a bond is a certificate which proves that a company borrowed money from you and now owes you money. Owning a bond is a way to earn interest payments instead of putting your money in a bank.

Therefore, if a bond can give you high interest coupon payments compared to bank interest payments, a bond value should be high.

On the other hand, if a bond will give you small coupon payments compared to bank interest, the bond value should be low.

A bond can be bought either from the original company which issues the bond, or from people who already bought the bond from the corporation, but who want to sell the bond before it expires because they don't want to wait too long before they get back their original investment

So to find the theoretical value of a bond, we need to think about the bond's interest coupon payments compared to bank interest payments, the bond's face value, and the length of time before maturity when you get back the full face value of the bond.


Sears Bond photo credit: Tom Spree via Wikipedia Creative Commons