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If I buy a bond and hold it to maturity, will the final payment be dependent on the current price of the bond, or will it be the amount I originally paid?

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For most bonds, the final payment will be the amount originally paid when the bond was issued. This is known as the "principal" or "face value"/"par value" of the bond.

If you bought the bond from someone else rather than from the issuer, then you'd have paid the market rate at the time which could be quite different. For example if current interest rates or the creditworthiness of the issuer have changed, then the value would have changed to reflect that.

In practice as the bond gets close to maturity, the market rate will converge towards the principal if there's no risk of default by the issuer, because it'll be clear that it'll pay exactly that amount and nothing else.

There are also special types of bonds where the principal can change. Inflation-linked bonds where the principal increases with inflation are one example of this. Usually it'd be clear from the bond's description when this is the case.

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  • Thanks, so for most bonds upon issue price is equal to the par value which is determined in advance by the present value of the coupons and market conditions?
    – charles
    May 10, 2015 at 23:18
  • It's possible the market value would diverge immediately from the par value, but that would suggest the interest rate on the bond had been set wrongly to begin with. May 10, 2015 at 23:39
  • Thanks, so a price change usually occurs once some new information has come out about the company a couple of months later? How unlikely is it to find a bond that remains at a stable price through to maturity?
    – charles
    May 10, 2015 at 23:41
  • The price will change if the the company looks more or less likely to default, but it will also change as market interest rates change - e.g. a bond paying a 1% coupon suddenly looks more valuable if interest drop and 0.5% would be the "right" rate if it were issued today. I think the interest rate aspect makes it unlikely that any long-term bond (5 years+) would maintain a stable price over its entire lifetime. May 10, 2015 at 23:52
  • So for the most part bond speculators are speculating on how strong the entity issuing the bond is and the change in the underlying interest rate set by the central bank? If so that answers everything, thanks again!
    – charles
    May 11, 2015 at 0:02

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