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