how do bonds work?

Question

Im learning about bonds, and i need someone to clarify some things for me. i dont know if this is right or not, but from what i have understood is that, when u purchase a bond, its present value is calculated, and it is less than the par value of the bond. so if i were to purchase a bond, do i pay the par or the present value? and the bond equals present value of par value + present value of interest annuity. so here is an example. the par value is 100$, let say interest is 34$. to buy it to day i pay 66$, then after it matures i get 100? or do i pay 100$ when i buy them? thanks

well lets say a bond has a face value of 100$. and an interst rate of 5% for five years. how much do i pay today? and how much do i recieve in 5 years, if the bond sells at face value, at a premium and a discount?

also, im learning about present value of annuity, how does present value relate to bonds?

Answer 1

You have quite a few questions on bonds, bond discounts and premiums. This is an excellent site to learn all these, but you must be patient.

Answer 2

Stock has a par value not bonds. Bonds have a face value that they are issued at. What you actually pay for the bond depends on the market. A bond may have a 5% interest rate and face vaue of $100. Depending on the market, it may sell for more than $100 (a premium) or less (a discount). Otherwise it will sell at face value, i.e. $100.

Answer 3

It depends on the bond.

Some bonds (for example, short-term U.S. Treasuries), are issued at a discount. You buy $1000 in bonds at a lower price. Let's say as an example that the bond is issued at a price of 97.500. You will pay $975 and receive $1000 at maturity. The $25 difference is your interest.

Zero coupon bonds are similar. You buy them at a deep discount and the difference between the issue price and the par value is your interest. Even though you don't physically receive your interest until maturity, you have to pay tax on the imputed interest (the accrued interest for that year).

Most bonds are issued at face value and pay interest. For example, you buy bonds for $100 with a coupon rate of 4%. For $1,000 in bonds, you will pay $1,000 and receive $40 in annual interest until maturity. If you buy them on the secondary market, the price may be higher or lower depending on whether the coupon rate is higher or lower than prevailing interest rates. Investors will pay more for a bond with a high interest rate and less for a lower rate.

These examples are simplified and do not account for brokerage commissions.