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
Assuming a rational person? no, because you’re better off putting your $151 into a bank than buying this bond.
But, it may be that somebody would pay $105 for it. And, it may be that the holder of that bond would sell it for $95.
Why? Because the bond represents future payments. If interest rates rise from 5% to, say, 8% overnight, then I could invest less than $100 to get the same future payments. And, if interest rates fall from 5% to, say, 2% overnight, then I would need to invest more than $100 to get the same future payments. The bond is just worth the present value of those future payments.
(Apologies for switching to $ from £. I don’t have a UK keyboard and didn’t want to do that much cutting-and-pasting.)
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