time to maturity affecting bond value

mehak.officiallink
Good Student
Posts: 31
Joined: Sat Mar 08, 2014 6:59 am

time to maturity affecting bond value

Postby mehak.officiallink » Sun Mar 30, 2014 1:26 pm

Why does bond value approaches par as the time to maturity comes nearer ?

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

time to maturity affecting bond value

Postby pradeeppdy » Mon Mar 31, 2014 6:40 am

Let's take an example of premium bond.
N=2, I/Y = 8%, Coupon = 10%, FV= 100, PV = 103.56
In market investors is getting only 8% annually but the bondholders are getting a 10% coupon annually and that's why they are paying 103.56 for the bond which is having 100 face value.
OK let's calculate the bond value after 1 year:-
N=1, I/Y= 8%, Coupon= 10%, FV= 100, PV= 101.85

You can see after 1 year Value is squeezed to 101.85. Because there is only 1 coupon is left after that you will get only 100.

Hope it is clear.


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