CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
A fixed-rate bond is priced at a premium to par. Holding all else constant, as the bond moves toward maturity its price will most likely:
The price will decline toward par. With an unchanged yield, a premium bond's price falls gradually as fewer above-market coupons remain, and it equals par on the maturity date, which is known as the pull to par effect.
- Adecline toward parCorrect
- Bremain above par until maturity
- Crise as the final principal payment nears
Explanation
With a constant yield, a premium bond's price converges to par at maturity (the pull to par), so its price falls over time. The premium's present value erodes as fewer above-market coupons remain. Option C reverses the direction, and B ignores that price must equal par at maturity.
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