Trading Of Bonds & Bond Pricing
Although like stocks, bonds can be traded. You do not have to hold on to the bond until maturity, and investors can buy or sell bonds at any time during the bond’s term. Before the maturity date, the value of the bond may be equal to, more or less, the full or face value of the bond. If investors can get more for lending money than the rate the bond offers, the price of that bond will go down. However, if the rate of the bond is higher than what the current interest rates are being offered for the bond, the bond will increase in value. Once a bond is issued, the term rate is called yield, since there are adjustments to the price of the bond. However, a bondholder receives full face value at maturity.
For example: Let’s say you have a bond for $10,000 for 10 years at 5%. Five years have gone by, and you have five years left. You need to sell your bond, but times have changed. The economy has heated up and people can now get 8% interest at a bank. The difference between the two rates is 3% or ($300 per year). This would amount to $1,500 over the remaining five years of the bond ($300 x 5 = $1,500). Therefore you would have to sell the $10,000 bond for $8,500 to keep your bond competitive with today’s current market rates.