The market cost of the bond is just the current value of future cash inflows related to the investment in Performance and Payment bonds. The current value of future cash inflows is calculated via the redemption value of interest and bond payments spread over the time period that is subsequently multiplied by the reduction factor that’s basically the market interest rate. Consequently, these variables determine the market cost of bail.
Economy Rate of Interest
This is the principal factor that determines the market price of this bond. This is due to the fact that the bond could lead to lower cash inflows instead of the continuing market rate of interest. The contrary is true if the market interest rate will be lower than the bond interest; in that event the market value of a bond will be greater than the level price. The market interest rate is accepted as the reduction factor in the calculation of the market value of all debt. The greater the market interest rate is; the reduced are the current worth of cash flows related to the bond.
Redemption value is that the money inflow that could be accomplished in the previous year of investment and so affects the improvement of the market value of bail. The market value of bail is very likely to be greater if the payoff value is higher than the level value.
Time Stage – Period
The market value of bail can also be determined by the period of time of investment. This period of time determines the number of interest payments that would be obtained over a time period.
Two comparable bonds which cover the exact same interest rate are most likely to have different market values if the time interval till maturity differs; the bond with longer time interval is very likely to have a greater market value as it contributes to higher money inflows over the duration of the investment.
The number of obligations would also affect the market value of the bail. Semiannual payments are most likely to lead to a greater market value of bail since the effective interest rate will be marginally higher than the yearly rate of interest.
This is again an important element that determines the market value of bail. The higher the rate of interest, the higher are the market value of bail because the interest payments ascertain the cash inflows over the duration of investment and these money inflows are integrated in the calculation of market value of bail.
In case the rate of inflation is greater than the interest rate of the bond, then the market value of bail will be lower than the level price. This is due to the fact that the bond wouldn’t have the ability to keep its real worth or its buying power and so could have a reduced market value so as to entice prospective investors.