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    Bond features and pricing explained in everyday language

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    3 $1,000 face value, 10 yr, noncallable bonds, same risk, YTM's are equal.

    Bond 8 has an 8% annual coupon
    Bond 10 has a 10% annual coupon
    Bond 12 has a 12% annual coupon

    Bond 10 sells at par. If interest rates are constant for next 10 years, does it make sense that they should all have the same price and the bond prices should remain at the current level until maturity?

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    Solution Preview

    See attached file.

    No, these bonds will not have the same prices and the prices will not stay at their current level until maturity. Let's answer these individually.

    First, the bonds will not have the same price at issue (when initially sold). If Bond 10 sold at "par" that means that the market rate of interest was 10%. If the other two bonds were sold (issued) at the same time, they would also yield the same effective ...

    Solution Summary

    Bond pricing seems to be difficult for everyone to really grasp. This discussion gives you the pieces in everyday language and a template in excel so you can "play" with the pieces and see how bond price moves around to verify for yourself what the discussion claims.