Discussion 07 Debt Valuation And Interest Rates

The first of the four bond relationships requires that the value of the bond is inversely related to changes in the bonds yield to maturity. As the principal and interest payments are fixed, the price of the bond must be adjusted so that the bond satisfies the markets current yield to maturity. Therefore is the bond yield goes up, the price of the bond must go down to allow the investor earn the market yield to maturity. If the market yields to maturity increases then the price of the bond should fall toallow the person who buys the bond today to earn the market yield to maturity. Second of the four relationships is that the market value of a bond must be less than its par value if the yield to maturity is above the coupon rate. Further, the market value of the bond will be above its par value if the yield to maturity is below the coupon rate of the bond. The third of the four relationships is that as maturity date approaches, the market value of the bond approaches its par value. Irrespective of whether the bond was trading at a premium or discount in the past,