Dollar Price

Understanding Dollar Price in Bond Pricing: A Comprehensive Guide

Investing in bonds involves understanding various metrics, including the dollar price, which determines the amount an investor pays to acquire a bond. Here's a detailed exploration of what dollar price entails, its significance, and how it impacts bond trading.

What Is Dollar Price?

Dollar price, concerning bond pricing, signifies the sum an investor pays to purchase a bond, typically equivalent to the bond's face or par value during issuance. However, when bonds are traded on the secondary market before maturity, their price may deviate from the face value, leading to the dollar price being quoted as a percentage of par.

Understanding Dollar Price

Bonds serve as financing tools for entities like companies, municipalities, and governments. They are issued to fund various projects or activities. Bond prices can be quoted in two ways: by dollar price or by yield. While dollar price reflects the bond's price, yield indicates the annual return until maturity. Bonds trading at par have a dollar price of 100, whereas those trading at a premium or discount are quoted respectively above or below 100.

Bond Yield vs. Dollar Price

There exists an inverse relationship between bond prices and yields. As bond prices rise, yields decline, and vice versa. This dynamic is crucial for investors to grasp as it influences their investment decisions and returns. Changes in interest rates affect bond prices; when rates rise, bond prices fall, and when rates fall, bond prices rise.

Dollar Price Example

Consider an investor purchasing a bond with a 10% coupon and $1,000 par value. If the bond's market value increases to $1,120, its dollar price would be quoted at 112%. Selling the bond at this price would yield a profit for the investor, in addition to accrued interest.