Question

Suppose you decide to invest in corporate bonds. Accordingly, you visit a bond store. You see 3 bonds on the shelf. One is priced at $1,015.53, another is priced to sell at $1,300.00, and a third is selling at a discounted amount of $876.06. All have a $1,000.00 face value, and carry equal risk. From your reading, and from class lecture, you know that you will be earning the same rate on your investment, regardless of which bond(s) you purchase. But you have a friend with you, who doesn't understand how you can possibly earn the same interest rate, due to the difference in purchase price. How will you explain this concept to him or her?

Answer 1

Total return=coupon+capital gains
The proportion of coupon in total return might differ in all bonds even though the total returns would be the same. In that case, the capital gains will compensate/offset.

Some bonds are priced lower and the return is majorly driven from the capital gains where the price will increase till maturity.

Some bonds are priced higher and the return is majorly driven from the current yield or coupon/interest payments.