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Explain how the market price of a bond is determined. Someone told you that the market...

Explain how the market price of a bond is determined. Someone told you that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she/he right?

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Answer #1

The market price of a bond is determined by the market rate of interest and investors fund availability towards for loaning the fund to the corporates. Higher the coupon rate above the market rate of interest will provide premium over the market interest rates to the investors, which boosts the investment in the corporate bonds.

It is wrong to say that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. It is the coupon rate of interest over and above the market rate of interest that will determine the price of a bond. Higher the coupon rate more will be the bond price.

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