The price that bonds will issue for in the market largely depend upon numerous economic factors....

The price that bonds will issue for in the market largely depend upon numerous economic factors. However, the relationship between a bond's stated coupon rate (or contract rate) and the market rate. This results in every bondholder achieving the same yield to maturity if the bond is held until it matures.

REQUIRED

please discuss this relationship between the coupon rate and the market rate by answering the following questions:

What is the nature of this relationship (i.e. directional, inverse, no relationship) and why is this so?
How does this impact bond pricing?
How are discounts and premiums on bonds payable accounted for?

Expert Solution

There is directional relation between coupon rate and market rate because monetary authorites of the country decides the lending rate and debt market the prevailing market rate so coupon rates on the newly issued bonds depends on the current market rate and coupon rate would move in the same direction in which market interest rates move. For example if maket interest rate rises the coupon rate on the new issue bonds would be higher than the previous issued bonds and vice versa.

Market rate and bond price are inversely related. Any change in the market rate would affect the market price of bond. if there is decline in market interest rate bond price would be higher than the face value and if market interest rate increases the price of the bond decreases and would be sold at discount.

discount refers to excess of par value over the issue price of bonds. Under discount bonds are issued at a price lower than the face value and discount is considered as loss or expense which would be amortized over the period of life of bond.

Premium refers to excess of issue price of bond over the par value. Under premium bonds are issued at price higher than the par value and excess amount is considered as profit and are amortized over the period of life of bonds.

ekkarill92 answered 2 years ago

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