Question

When researching which corporate bonds to invest, you noted that some bonds were trading at a premium (e.g. 4.7% coupon bonds issued by BSD Ltd was trading at 5% above its par value), whereas some were trading at a discount (e.g. 5.25% coupon bonds issued by API Ltd was trading 2% below its par value).

1. Hypothesise four (4) reasons for your observations.

(Approx 600 words)

(About 150 words per hypothesise.)

Answer 1

BONDS TRADING AT A DISCOUNT

1.a discount bond is a bond that is issued at a lower price than its par value .it is similar to a zero-coupon bond ,only that the latter does not pay interest until maturity.  

2.when bondholder percieve the issuer as being at a higher risk of defaulting on their obligation, they may only be willing to purchase the bond at a discount

3.when interest rate rise above the coupon rate of the bond, the bond will trade at a discount .this allows them to earn a sufficient return on their investment

4.a bond rating agency may lower the credit rating of an issuer. the lower rating means increased risk so the bond will trade at a discount to compensate investors for the additional risk

  BONDS TRADING AT A PREMIUM

1. a premium bond is a bond trading above its face value or the cost more than the face amount on the bond

2.a bond might trade at premium because, its interst rate is higher than the current market interest rate

3.the company's credit rating and bond's credit rating can also push the bond's price higher

4.investors are willing to pay more for creditworthy bond from the financially viable issuer