We are often asked by investors why they should pay above par for a bond. Why should they buy an XTB today for $110 when they know it will mature at $100?
Let’s say that you have decided to invest in a bond and have three to choose from:
- Bond A: Price $100.00 pays a coupon of 3.0%
- Bond B: Price $99.61 pays a coupon of 2.8%
- Bond C: Price $100.96 pays a coupon of 3.5%
All of the bonds mature in two years, in 2020. Which one would you choose?
Instinctively, most investors would select either Bond A or Bond B, a bond trading at or below its par or Face Value. However, you may be surprised to discover that the Yield to Maturity for each of these bonds is the same - 3.0%. So, based on yield and coupons alone, how can an investor choose between these three bonds?