A bond has a coupon rate of 1 The bond has 20 years to matur

A bond has a coupon rate of 1%. The bond has 20 years to maturity and the current interest rate is 8%. What will happen to the value of this bond over time? Explain in detail.

Solution

The coupon rate of the bond is lesser than the current interest rate of the bond. The bond will sell at a discount. So as time passes and we approach maturity, the price of the bond would converge to the par value. The price of the bond will increase till it approaches the par value after 20 years assuming the interest rate remains constant.