A bond calculator is a tool that helps determine the price or yield of a bond. By knowing the coupon rate and time to maturity, one can use the calculator to determine the missing pieces of information. Though these calculations can certainly be done by hand, a bond calculator helps get the results faster and more easily.
Bonds are debt instruments that are issued by companies and governments to raise money. These debt certificates can come in a variety of forms, including perpetuities, zero-coupon, and municipal bonds. The common fixed-rate bond essentially works like this: the lender or creditor buys the debt — the principal — from the borrower or debtor. The borrower or debtor pays the interest the principal via "coupon" payments at regular intervals, and then the principal is repaid at a pre-determined date — the maturity date.
The face value of a bond, also known as the principal or nominal, is the amount on which interest is paid for the duration of the bond. The market price of the bond usually differs from this value, however, depending the borrower’s ability to make the promised coupon payments, interest rate changes, and other macroeconomic shocks. The yield then, is the difference between the principal and this total price.
When a bond’s price equals its face value — that is, nothing changed since the bond was purchased and the debtor met all of his obligations — the yield is simply the coupon rate. The creditor in this case absorbed a yield or profit equal to the coupon of the bond. When the price moves above or below the bond's face value, however, the yield changes. In fact, price and yield are inversely related. That is, if the market price increases, then the yield decreases, and vice versa.
A bond calculator helps determine a variety of pieces of information depending on what figures about the bond are known. One can uncover, for example the current yield, the yield at maturity, or the price. Additionally, the bond calculator may allow one to adjust the price or the yield along a sliding scale to see all corresponding prices and yields, for the particular bond in question. These bond calculators exist in a variety of places on the web.