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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A fixed-rate annual-pay bond issued by a financially sound company is priced at a discount to par. Assuming the bond's yield-to-maturity stays unchanged and no default occurs, its price over the remaining life will most likely:

The price will rise toward par as maturity approaches. With a constant yield, a discount bond's price accretes along the constant-yield path because the coupon is below the yield, so the price converges smoothly to par value at maturity.

  1. Arise toward par value as maturity approaches.Correct
  2. Bstay at the discounted level until maturity and then jump to par.
  3. Cfall toward par value as coupons are paid.

Explanation

A discount bond has a coupon rate below its yield. When the yield is constant, the carrying value accretes along the constant-yield trajectory, so the price rises toward par (pull to par). The price does not stay flat or jump at maturity, and it does not fall.

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