Answer to Question #119699 in Financial Math for Piya

Question

Explain in a paragraph of about 100-150 words when and why would a bond be sold on a premium or discount? You may use graphs, equations, or other aids to assist your explanation.

Answer 1

GOVERNMENT BONDS   

   Government a times is faces by hard times inflation tension in economy.

This makes the government to come up with solutions to curb this tension as it may decrease or make the country's currency to loose value. Some of this solutions are the government to sell the bonds to the public . For the public to accept this and to make their demand to be high government have some measures ,one of this measures is to give interest in the bonds e g. In every bond bought at 50$ there is 5% interest after a particular period of time . When this is done the public will compete to by this bonds as they will give a positive increment to their investment.

The other measure is the government to sell the bonds in premeum or discount.This entails ease some money on the bonds so as to make them cheap than they were there before. e g 

Last year each bond was 70$ each but this year the government gives 13 .5% discount on each bond. This makes the public to have an investment interest to the bond and as they buy more books the government decreases the money flow in the public hence decreasing inflation risk.