2

If I hold a bond to maturity, then on day of maturity, will I get back:

  1. The price of the bond at maturity? or,
  2. The price I paid when I bought the bond? or,
  3. The par value of the bond?

My guess is #1, but the confusion is: At maturity, the bond will stop trading, so price of the bond at maturity is the last traded price/last Ask Price?

4

If a bond is not defaulted by the creditor, the creditor will pay any interest outstanding and par at maturity.

Par is the contracted amount of the debt, so regardless of what the price of the bond is in the market, the bond will pay the amount stipulated in the bond contract; therefore assuming no default and no outstanding interest, a price below par will provide an un-risk adjusted, undiscounted gain at maturity while a price above par will provide an un-risk adjusted, undiscounted loss at maturity.

  • 1
    Ok thanks. In that sense, when i buy a bond, my principal is always protected (assuming no default). So I should not worry if the price of the bond in the open market goes down. If it goes up, then great, but if it goes down, no problem, because I am guaranteed the par. IS this correct? – Victor123 Jan 28 '14 at 17:37
  • 2
    @Kaushik correct in a general sense. But say you buy a bond at 3% interest then the market interest rate rises to 5%. Then you are losing out and the market value of your bond will decrease. To make things even more complicated, bonds have ratings that are supposed to be an indicator of the risk of default. My answer has a link to investopedia where this is talked about more – grayQuant Jan 28 '14 at 18:10
1

At maturity, the last traded price should be the par value plus any amount of interest yet to be paid, typically none or one final payment. So the idea of investing in a bond is to collect the interest and then get back your principal upon expiration. During the life of the bond, the market/trading value of the bond is determined by current interest rates and amount of time until expiration.

http://www.investopedia.com/exam-guide/cfa-level-1/fixed-income-investments/bond-vaue-price.asp

  • 1
    One point: You do not get back your principal (what you paid the market to get the bond); you get the face value of the bond, printed on it by the original issuer. A $1000 8% 20 year bond issued 15 years ago, would sell today for well over $1000, but you would still only get the $80 interest payments and the $1000 on maturity. – DJohnM Jan 28 '14 at 19:56

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