Why Bond Prices Approach Principal at Maturity

Summary

The document asks why a fixed coupon bond appears to trade near its face value as maturity approaches, even though discounting its final principal and coupon at the stated coupon rate seems to imply a price above par. It sets out a three-year par bond example and points to market listings, but provides no answer or analysis to resolve the discrepancy.

The key distinction for interpreting such quotations is between clean price, which excludes accrued interest, and dirty price, which includes it. Near a coupon date, the dirty price reflects the next coupon as well as principal; at redemption, the bond repays its contractual face amount, while the final coupon is a separate cash flow. The coupon rate alone does not determine the market discount rate, so the example’s valuation assumes a yield that may not match market conditions. The document raises the question but offers no evidence beyond the example and listings, and does not specify quotation conventions or timing relative to coupon payment.

Key ideas

• A bond’s market price depends on its yield as well as its coupon and remaining cash flows.
• Clean prices exclude accrued interest, while dirty prices include it.
• At maturity, principal repayment is determined by the bond’s terms, with the final coupon paid separately.
• The example’s valuation assumes a discount rate equal to the coupon rate, an assumption not established for the cited market prices.

Tags

# Bond prices tend to 100 at maturity?


# Bond prices tend to 100 at maturity?












Let's assume we have a fixed-income bond, which is paying a yearly coupon. For example a 3 year bond, 1% fixed coupon, issued at par. So we have

at issue -> $Price=\frac{1}{(1+0,01)^1}+\frac{1}{(1+0,01)^2}+\frac{101}{(1+0,01)^3}=100$

Now, when I am near maturity I think this should be something like

$Price=\frac{101}{(1+0,01)^{0.0001}} \simeq 101$

But it seems market prices tend to be 100 near maturity. You can see for example

1- https://www.milanofinanza.it/quotazioni/dettaglio/btp-01-02-2018-4-5-1ac03dd?refresh_cens

2-http://www.boerse-berlin.com/index.php/Bonds?isin=ES00000123Q7

Which one is correct?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.