Question

If the market rate is at 10%, How would a bond sell for if the following interest rates on the bond were presented? Bond 1 Interest rate of 13% Bond 2 Interest rate of 9.75% Bond 3 Interest rate of 10%

Answer 1

Firstly, we should understand the basic concept that the market rate of interest and a bond's interest rate i.e. coupon rate is interrelated and will impact bond pricing.

Please remember the following rules:

If Coupon rate i.e. Bond Interest rate > Market Interest rate - the bond will sell at a premium because there will be a huge demand for it and the same will be visible in its market price.

If Coupon rate i.e. Bond Interest rate < Market Interest rate - the bond will sell at a discount because there will be less demand for the bond and the same will be visible in its market price. The reason for the same is higher return is available in the market why would they want to invest in bonds.

If Coupon rate i.e. Bond Interest rate = Market Interest rate - the bond will sell at a par value because the investor will be indifferent among both of them as both are offering same returns.

Thus, the answer would be:

Bond 1 Interest rate of 13% > market-rate - bond will sell at a premium

Bond 2 Interest rate of 9.75% < market-rate - bond will sell at a discount

Bond 3 Interest rate of 10% = market-rate - bond will sell at par

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