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Explain why bonds sell for below par when the yield to maturity is higher than the...

Explain why bonds sell for below par when the yield to maturity is higher than the coupon rate and why they sell for above par when the yield to maturity is lower than the coupon rate

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Answer #1

When coupon rate of bond is smaller than Yield to Maturity of the bond then it means that bond is earning lesser than the return that market is giving, so bond is trading below its par value in the market to give adjusted return equal to YTM, so bond is trading at discount.

Similarly,

When coupon rate of bond is higher than Yield to Maturity of the bond then it means that bond is earning more than the return that market is giving, so bond is trading above its par value in the market to give adjusted return equal to YTM, so bond is trading at premium.

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