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Hi John , just wanted to know that if a company’s cost of debt is x and if it pays the cuopon on those bonds at the same rate throughout then the market value of the bond will be stay at 100 i.e par value?
Secondly how does a company decide at what price the bond should be issued I mean should it be issued at par, below par, above par?I think, that depends on the credit rating of the company,current interest rate and company policy.
The market value of the bond will not start at par value throughout.
The market value is the present value of the future receipts discounted at the investors required rate of return.
The required return will change (as general interest rates change) and this will therefore effect the market value. (It does in real life – when interest rates go up, the market value of bonds falls, and vice versa).
Also, assuming the bond is redeemable, then time to redemption will change, and when this is discounted this will effect the market value also.
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