Question

If you buy a bond for more than par value it is either because you required rate of return, or market rates for like bonds, have:

declined since the bonds original issue

no real impact on your decision

increased since the bonds original issue

stabilized due to growth in the economy

lots of shiny jewelry that sweetens the deal

Answer 1

Answer is - Declined since the bonds original issue

Price of a bond and market interest rates or required rate of return are inversely proportional to each other. As any of the 2 rates decreases, price of a bond increases. This can be explained by the following phenomenon.

Assume a firm issues a bond today, with a coupon rate of 10% (which is almost the same as market interest rate - why would anyone pay you higher than 10% when market is paying you that, and why would you buy anything lower than 10%, when market is giving you 10%). After an year, the interest rates have declined to say 8%. Now this particular bond, which is paying coupon of 10%, would see a higher demand, given that it is paying higher coupon than market rate. Higher demand, means higher price, and hence market price of bond would increase.

Opposite phenomenon would take place, when interest rates increase (to day 12%). Demand of this bond would decline as other bonds issued would offer 12% coupon. So demand decrease would lead to a decline in price.