Discount Bond: Definition, Properties, and Examples
Not what you're looking for?
a. What is a discount bond? What will happen to the price of a discount bond as it
approaches maturity?
1- Given TWO (2) identical bonds with the same coupon rate but different maturity dates,
the bond with a longer maturity date is said to be more risky than the bond with a shorter
maturity date. Why?
2- A bond is called a discount bond when the selling price is lower than its par value.
Theoretically, why do discount bonds exist?
3- An increase in interest rate will result in a fall in bond prices. But the price change
experienced by a bond with low coupon rate will be much more than that of a bond with
high coupon rate. Why is this so?
Purchase this Solution
Solution Summary
This solution includes the definition of a discount bond and explanations what happens to the current price of a bond when the market rates fluctuate or when time to maturity changes. Some examples are provided to clarify the explanations. Attached in Word.
Solution Preview
Dear Student,
The explanations on bonds below are in blue. The calculated examples are meant to clarify the explanations. In the examples, N = number of years to maturity, I = market interest rate (or yield to maturity, assuming we hold the bond until maturity), PMT = coupon interest rate (in dollars), and PV = current price of the bond. A financial calculator has been used in computations.
Best regards,
Your BrainMass Academic Expert
a. What is a discount bond? What will happen to the price of a discount bond as it
approaches maturity?
A discount bond is a bond selling below par (face value). Face value is always $1,000 unless otherwise stated. Thus, the current price of a discount bond is below $1,000. As the bond approaches maturity, its current price will gradually shift upwards, reaching $1,000 when the bond matures.
Bonds are usually issued at the market interest rate. As time goes ...
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.