CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
An investor buys a bond at a premium to par, and its yield to maturity stays constant until maturity. Over the remaining life, the bond's price will most likely:
The price will fall toward par value. A premium bond has a coupon above its yield, and with a constant yield the premium shrinks over time until the price equals par at maturity. This pull-to-par effect means the price cannot stay level or rise.
- Afall toward par valueCorrect
- Bstay equal to the purchase price
- Crise above the current price toward maturity value
Explanation
With a constant yield, a premium bond's price converges to par at maturity because the premium is amortized over time. Its price therefore declines gradually and approaches par. It cannot stay constant or rise, since the maturity value equals par, which is below the current price.
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