- This topic has 1 reply, 2 voices, and was last updated 11 years ago by
.
- Posts
Hi John, am ok with the market value of bonds calculation and I understand why if interest rate rises the market value of the bond fall (because of discounting with high rate to pv) but am wondering if the only reason why the market value of the bond fall/rise is due to discounting to PV(with high/low rate). Also, who’s perspective is the calculation based (company or investor). And why would an investor pay lets say $112 per bond and on redemption receive $100 per bond.
Thank you.It is the investors who determine the market value of a bond.
The market value will change due to changes in the required rate of return (which changes with general interest rates).
The market value of redeemable bonds will also change as it gets closer to maturity (repayment).
It is still the present value of the future expected receipts, but as time goes by the time till repayment changes.As regards why would an investor pay $112 – suppose the bonds have a coupon rate of 20%, are repayable at par ($100) in 5 years time, and currently the required rate of return is 3%. Discount the expected receipts at 5% and you will find that the market value (present value) is higher than $100 🙂
- You must be logged in to reply to this topic.