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There are some old bonds here in Hungary that currently sells at 111% of face value and after taxes they have 5,1% coupon yield.

They have 3 years left. If I keep it till maturity, the YTM is only 0,7%.

So my plan is I to buy it hold it for 2 years, then I sell it in the last year.

My question is how does the price of bonds change that are about to expire? Do they generally converge to 100%?

  • Some bonds may be indexed to inflation or some corporate bonds may be convertible to stock so there are a couple of nontraditional cases where 100% wouldn't be the target. – JB King Aug 3 '14 at 19:06
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Yes, they converge to 100%, but will never actually reach 100%. No-one will buy them if there's no remaining profit. The less time to expiration - the significantly less the risk of default, so no reason for premium/discount on sale. If the bonds pay interest, the price will probably reflect the remaining interest payments. In 2 years, you're likely to sell the bonds at say 102-105% of the face value.

  • I'd think TIPS in the US may be an exception here as the principal amount will be adjusted every 6 months that makes the value different than 100% of the face value over time unless the CPI changes end up at 0% though this isn't the common case it is worth noting to my mind. – JB King Aug 3 '14 at 19:07

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