Series 65: Factors Affecting How A Bond Is Valued

Factors Affecting How a Bond Is Valued

The following factors all play a role in how a bond is valued. The value of a bond is usually reflected in its price, so when we refer to a bond’s value, you can think about it’s price. But know that occasionally a bond’s price will be different from its value, affording an investor an opportunity to profit from the difference. I would memorize how each of these factors influences a bond’s valuation.

• • Par value. A bond’s valuation usually starts with the par value (face value) and is valued either to a premium or discount to the par value.
• • Maturity. The value of bonds with shorter maturities will stay closer to par throughout their lives, while the value of longer-term bonds will vary more from par during their lives. Additionally, as a bond gets closer to maturity, its value gets closer to its par value. This is called price convergence.
• • Call date. If interest rates go down, the issuer is likely to call a bond, so the