Price or value of debt securities is the present value of the stream of cash flows received from the remaining interest and principle. On the other hand, it can be called  the “time value of money”. It can be approximately calculated whether the price should be above or below its par value by comparing the market rate (the required rate of return) with the coupon rate (the rate specified on the security).

Example: A debt security with par value of 1,000 baht paying 6 percent coupon rate

Case 1 market rate is 6 percent (equal to interest rate)

The price of this security should be equal to its par value of 1,000 baht, since there is no difference on rate of return between holding this security and investing in other kind of investment vehicles.

Case 2 market rate declines to 4 percent

The price of this security should be higher than its par value since a buyer is willing to pay more for getting a coupon rate of 6 percent, higher than other investment paying only 4 percent.

Case 3 market rate increases to 8 percent

The price of this security should be lower than its par value since a buyer has a chance to receive 8 percent from other investment which is higher than 6 percent coupon rate of this security.

Difference between Dirty Price and Clean Price

Normally, the debt securities are traded with the price including accrued interest (the interest accrued from the last coupon date to the trade date).  This price is called “dirty price or gross price”.  The price excluding accrued interest is called “clean price”.

Other Factors Affecting Price of Debt Securities

In addition to market interest rate, there are also other factors influencing price of debt securities, e.g., credit rating either of the securities themselves or of the issuers.  In a case where the securities or the issuers are downgraded, the investors will ask for higher investment return rate as a risk premium, resulting in the decrease of  the securities price. Besides, other economic factors such as an inflation rate also have an impact on interest rate expectation which then affect the price of the securities as well.