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For example, in a scenario where experts are predicting economic inflation, the market interest rate for the bond may rise due to the fact that investors will expect more cash to offset the decrease in the value of the currency at large. Generally speaking, if a market interest rate exceeds a coupon rate, the value of the bond will likely drop. Once a bond issuer has set a coupon rate and a face value, the bond issuer logically wishes to obtain the highest possible market price for the bond issue.

Typically, private companies will hire an investment bank to underwrite the bond issue.

How to Determine the Current Value of a Bond

The investment bank, or syndicate of multiple investment banks, will purchase the entire bond issue and resell the bonds to large-scale and institutional investors on the open market. Many governmental entities, such as the United States Treasury, will sell bonds directly to large-scale investors through auctions rather than using an underwriter as a middleman.

The amount paid by investors for a bond, whether purchased through a direct auction, an underwriter or from another investor is the bond's market price.

Why Bond Prices and Yields are Inversely Related

When the market price is less than face value, then the market rate, or yield, of that bond will be greater than the coupon rate. When the market price is greater than face value, then the market yield of that bond will be less than the coupon rate.

Therefore, the relationship of the coupon rate and the market yield depends upon the market price of the bond. Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity.


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