Why do Bonds typically not sell at face value?

Question

Any clarification would be greatly appreciated

Answer 1

In ronwizfr's example, company's X bond sells at $100 @6%.  2 months after that bond is issued, company Y sells a bond also for $100 but offers an interest rate of 6.2 or whatever percent.  Now if the X bond still offers 6%, no one would buy it so, as the interest amount does not change the price secondary market price goes down to $95 so the 6% interest plus the $5 capital gain = the amount offered by company Y.

and visa versa if people offer to buy bonds at 5.8%, you will say you will sell your at $105 (or whatever price equals .2%points) to bring the yield to maturity down to what the market will buy at.

Answer 2

Certainly bonds face interest rate risk, but they are also subject to buying and selling pressure.  In our current environment, the stock market has shown greater instability.  When the stock market becomes too risky, investors buy treasury bonds which are considered risk free.  Buying pressure raises the selling price of bonds even if interest rates remain unchanged.  Investors are willing to accept a lower yield based on the almost certain risk of losing money in the stock market.  In this case, a smaller yield on a treasury bond is preferable to taking a loss on stocks.  Likewise, when stocks look safe, selling pressure drives the bond price dowwn.  In this case bond holders are willing to sell at a lowwer price because they believe they can get a larger return by moving back into stocks.

Answer 3

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Answer 4

Bond prices fluctuate to reflect the going interest rates.

Suppose you have a bond with a face value of $100 and 6% interest. This means you will receive every year $6 and $100 at maturity.

Now suppose this bond is actually selling at $95. Then the effective yield will be *more* than 6%, as the extra $5 your will gain at maturaty adds a few tens of a percent.

Answer 5

It is because bond price is affected by interest rate.

Answer 6

Because interest rates change after the bonds are issued.