TL/DR: looked everywhere, no straight answer to the following:
If a bond costs £100 initially with £5 return for 10 years, it will fully return £150 after 10 years. (Wild example, I know)
Would someone at any point pay over £150 (or over how much it currently has left)?
If so, why?
In: Economics
Never more than £150, unless there is something odd going on (for example, a tax break or some inflation protection).
Simplify it a bit. What is £100 worth to you right now? Obviously, exactly £100. A bond, though, is a promise for *someone* to pay an amount *in the future*: those two factors both reduce the value.
Now, what is £100 *one year from now* worth? Basically that’s the same question as “what do you think inflation will be over the next year?” – maybe about 3%, so say £97.
Now we look at the issuer. If it’s a Western government, we treat it as virtually certain to be paid: the US or UK government isn’t going to go bankrupt – a year from now, their bonds *will* be paid. (Apart from anything else, as governments with their own currency, they can literally just print a new £100 or $100 and hand it to you – bond paid.) So apart from inflation, we can trust them: on July 1st 2025, a bond saying “the UK government will pay you £100 on July 1st 2025” really will be worth the full £100 – so it’s worth about £97 now, if that’s the expected rate of inflation.
What if it’s a company though? Obviously not quite as solid a guarantee as a government: Tesco can’t just print £100 as needed, but they’re pretty solid – maybe 99% sure? So, if a government bond paying £100 in a year is worth £97 now, maybe that bond from Tesco would be worth more like £96.
Lower down the scale, say your local burger van needs new equipment, and finances it by selling bonds: in a year, they’ll pay you £100 – if they’re still going. That might be more like a 50-50 bet – so their promise to pay £100 in a year might only be worth £48 right now. If desperate, the burger van owner might actually try printing his own £100, and that’s part of the problem: he won’t be selling any burgers if he gets caught, and then your bond is worthless!
Which is why credit ratings exist, and why it’s a big deal for a company or country to have their rating downgraded: a country with a top credit rating will pay less to borrow today than a country with a lower rating will.
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