Market Value

Study guide: Exam FM-2

The market value of a bond (or any financial asset) is its current price in the open market, determined by supply and demand. For bonds, market value equals the Present Value of all future cash flows discounted at the prevailing market Yield Rate:

\text{Market Value}

= Fr \cdot a_{\overline{n}|j} + C \cdot v^n_j

• Market value differs from Book Value (the amortized carrying value) and Face Value (the principal).
• When the market yield j exceeds the modified coupon rate g = Fr/C, market value is below the redemption value C (a discount bond).
• When the market yield is below g, market value exceeds C (a premium bond).
• Unless a question says otherwise, C = F, so g is the coupon rate and the comparisons are with the face value.

Market Value After Rate Change A 10-year 1{,}000 bond with 5% annual coupons was originally priced to yield 5%. Two years later, market yields rise to 6%. Find the new market value.

Answer 8 coupons remain: P = 50 \cdot a_{\overline{8}|6\%} + 1000(1.06)^{-8} = 50(6.2098) + 627.41 = 310.49 + 627.41 = 937.90.