Suppose that you purchased a debt obligation three years ago at its par value of $100,000 and nine years remaining to maturity. The market price of this debt obligation today is $90,000
What are some reasons why the price of this debt obligation could have declined from time you purchased it three years ago?
The price of a bond will change for one or more of the following three reasons:
(i) There is a change in the required yield owing to changes in the credit quality of the issuer.
(ii) There is a change in the price of the bond selling at a premium or a discount, without any change in the required yield, simply because the bond is moving toward maturity. In case, the bond is selling at a discount.
(iii) There is a change in the required yield owing to a change in the yield on comparable bonds (i.e., a change in the yield required by the market).
The first and third reasons are the most likely reasons for the drop in valuesince the bond is still nine years away from maturity Thus, the bond has plummeted from $100,000 to $90,000 mainly because the credit quality of the issuer has fallen and/or the bond has plummeted because the yield on comparable bonds has increased.
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