Explain why some bonds sell at a premum over par value while other bond sell at...

Explain why some bonds sell at a premum over par value while other bond sell at a discount?

Expert Solution

-The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value

-If the coupon rate of a bond is above the current market interest rates, a bond will sell at Premium.

-When pricing bonds, there is an inverse relationship between the Market price and market interest rate or Yield to Maturity of the Bond

-The Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

-If the Market Interest Rate Increases, then the discounting rate will be higher & the discounting factor will be lower and it will result’s in the Market Price of the Bond to be lower.

-If the Market Interest Rate Decreases, then the discounting rate will be lower & the discounting factor will be higher and it will result’s in the Market Price of the Bond to be higher.

- If the Yield to Maturity [YTM] is greater than the coupon rate, then the selling price of the bond will be less than its par value, since the bonds are selling at discount

- If the Yield to Maturity [YTM] is less than the coupon rate, then the selling price of the bond will be more than its par value, since the bonds are selling at premium.

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