Question

Which of these pairs of bonds will trade at a higher price?

A           4% Government of Canada bond due January 15, 2023

                                                OR

            4% Government of Canada bond due January 15, 2030

B          5.5% Province of Ontario bond due June 1, 2025

                                                OR

            8.0% Province of Ontario bond due June 1, 2025

C          4.5% Government of Canada bond due April 5, 2022

                                                OR

            4.5% Bank of Mike bond  BBB rated due April 4, 2022

Answer 1

A. Note that the price of the bonds moves towards their par value as they approach the maturity date which means that the duration and price of a bond are inversely related. Thus, a 4% bond due on Jan 15th, 2023 will be traded at a higher price.

B. Note that the interest rates and the price of bonds are inversely related to each other. Hence the 5.5% province of Ontario bond will trade at a higher price as the higher price implies that the cash returns after the maturity here will be lower.

C. Note that the bonds with the higher risk will be traded for less because the higher risk would have to be compensated by the higher yield which is due only when the price of the bond is lower. BBB rated bonds are riskier than the government bond and thus 4.5% Canadian bond will be traded for more.  

"Note that the higher yield on the bonds will make people to pay more"