Question

Answer each question succinctly yet completely. Be mindful of the multiple parts to each question.

11. What causes a bond to trade at a discount from its issuance price? What causes a bond to trade at a premium to its issuance price? Would a AAA bond issued in 2006 with a 9% coupon and a 30-year maturity likely be trading at a discount or premium today? Why? At what price do bonds purchased at premiums and bonds purchased at discounts each trade at maturity?

Answer 1

If current yield is greater than coupon rate then bond will trade at a discount from its issuance price. At discount bond price is less than issuance price.

If current yield is less than coupon rate then bond will trade at a premiun to its issuance price. At premium bond price is more than issuance price.

Current yield rate for 30 year maurity bond is 3.15%. So while using this yield for valuing the AAA bond then bond will be trading on premium.

At maturity all bonds trade at its face value.