Question

Why do some bonds sell at a premium, some at par and some at a discount? What are some advantages and disadvantages of investing in bonds?

Your answer should be a paragraph that contains at least four (4) sentences but no more than ten (10) sentences

Answer 1

This is because investors want a higher yield, which such a bond gives them, and thus they will pay more for it. A bond currently trading for less than its par value in the secondary market is a discount bond. A bond will trade at a discount when it offers a coupon rate that is lower than prevailing interest rates.

Some advantages of investing in bonds are

1. The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks). 2.Bondholders also enjoy a measure of legal protection

3.Bonds are often liquid.

Disadvantages of investing in bonds are

1. Fixed rate bonds are subject to interest rate risk, meaning that their market prices will decrease in value when the generally prevailing interest rates rise.

2. Some bonds are callable, this creates reinvestment risk, meaning the investor is forced to find a new place for his money. As a consequence, the investor might not be able to find as good a deal, especially because this usually happens when interest rates are falling.

3. A company’s bondholders may lose much or all their money if the company goes bankrupt. There is no guarantee of how much money will remain to repay bondholders.