Question

Regarding to the relationship between bond maturity and bond value, what’s of the following statements is not correct.

		At maturity, the value of any bond must equal its par value
		The value of a premium bond would decrease to its par value.
		The value of a discount bond would increase to its par value.
		A par-value bond stays at $1,000 even if the market interest rate changes.

Answer 1

When a bond is issued, the bondholder is guaranteed a fixed price at the end or the maturity of the bond which is called the par value. So every bond which is issued will ultimately mature at the rate which is fixed in the beginning.

For example if a company issues a $1000 bond with a maturity period of 10 years and coupon rate of 7% for $ 970, the bondholder pays $ 970 in beginning and then will be entitled to receive coupon payments of $ 70 ($ 1000 * 7%) every year for 10 years and at maturity of the bond he will receive $ 1000 whiich is the par value.

So, each bond whether it is a premium bond or discount bond will mature at its par value. Therefore the first three statements are correct and the last statement which states that a par-value bond stays at at $ 1000 even if the market interest changes is incorrect as the market interest rates impact the price of the bond. If the interest rate is higher than the coupon rate of bond then then the bond price falls and if the coupon rate is higher then the bond price increases. But ultimatelty the par value remains the same and the price of the bonds fluctuate.

So, the last statement is not correct.

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