Explain in 300-400 words, why some bonds sell at a premium over par value while
ID: 2793728 • Letter: E
Question
Explain in 300-400 words, why some bonds sell at a premium over par value while other bonds sell at discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value? Explain in 300-400 words, why some bonds sell at a premium over par value while other bonds sell at discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?Explanation / Answer
The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decreases and when interest rate falls bond price increase. This is because fixed coupon rate. So, if interest rate fall even the bondholder gets the fixed coupon payment so overall value of bond increase. Similarly, when interest rate rises even the bond holder gets the coupon rate at same rate so overall bond price fall.
So if market rate decrease from date of issue that is coupon rate then price of bond increase and bond sells at premium and if market rate increase from date of issue that is coupon rate then price of bond increase and bond sells at discount.
There are so many reason of increase/decrease in market rate. such reason might be, credit rating of bond decrease / increase, fed has decrease or increase rates, inflation in economy increase or decrease.
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