Question

If a bond issued 3 years ago with a 4% coupon rate now trades at 112.75, what can you infer has happened to market interest rates during the past 3 years? What do call the price of this bond relative to its issue price (if issued at face value)?

Answer 1

Face value of the bond = 100

Coupon payments = 4% of 100 = 4

- An inverse relationship exists between a bond price and the prevailing market interest rate.

We know that the value of the bong is inversely related to the market interest rate. Since the value of the bond has increased we can say that the market interest rate has gone down. The interest rate has decreased.

Since the value of the bond price is greater than its issue price or face value. The bond is selling at a premium and such kinds of bonds are known as Premium Bonds.