Bond pricing Bond pricing Note: You will need to refer to the TVM charts at the back of chapter 6 of the Kieso text in order to solve for these.
Coupon rate vs. Market rate Coupon rate vs. Market rate Bonds can be issued at a premium, discount or par value. The relationship between the coupon (face) rate of the bond relative to the market (yield) determines the selling price of the bond If the coupon (bond) rate is GREATER than the market rate, the bond will sell at a PREMIUM. This is because our bond offers better interest than other securities in the market, so we can charge a higher price. . CR>MR = Prem. If the coupon (bond) rate is LESS than the market rate, the bond will sell at a DISCOUNT. This is because we have to offer our bonds for less to entice buyers. CR<MR = Disc. If the coupon and market rate are the SAME, the bond will sell at PAR. CR=MR = Par.
Components of bonds Components of bonds There are two parts to a bond – the principal and the interest.