The reasons why bonds rarely sell for their maturity value are:
1. The interest paid is usually fixed at the interest rate that is stated on the face of the bond. As a result, the amount of interest paid each year does not change during the life of the bond.
2. The market interest rate—the rate that bond buyers demand—is changing daily.
To illustrate, let’s assume that a 6% bond will mature in ten years and has a maturity value of $100,000. This means that the bondholders will be receiving $6,000 in interest in each of the ten years. If there is a day when the bond buyers demand an interest rate of 6.2% then the bond’s value on that day will be less than $100,000. If on another day the bond buyers demand 5.9% interest, the bond’s value on that day will be greater than $100,000.
Learn more about Bonds Payable.
About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.
He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.
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