Here is a quick reference chart to help you determine market price and coupon rate of bond trades.
– When a bond trades at par value:
– Market Price = face value
– Coupon Rate = market interest rate
– When a bond trades at a discount:
– Market Price < face value
– Coupon Rate < market interest rate
– When a bond trades at a premium:
– Market Price > face value
– Coupon Rate > market interest rate
Bond Pricing Principles
– Interest rates and bond prices are inversely related.
– The longer the time a bond matures, the more volatile the market value of bond in response to changes in interest rules.
– Lower coupon bonds are more volatile in price than higher coupon bonds when interest rate changes.
– Lower coupon –> greater % in future = volatility