In this paper, we show that the price of a
premium bond and the price of a discount bond will both move toward face value
at an increasing rate as the bonds approach maturity. We present a
mathematical proof to show that the decline in premium and discount decline over
time, to be referred to as time decay, accelerates as time passes by. We also
provide numerical examples and graphical representations to illustrate the time
passage effect on bond prices and discuss the implications of the findings to
bond investor and asset managers in light of the quantitative easing policies
taken by central banks after the 2008 financial crisis.
Cite this paper
Brusa, J. , Gu, J. and Liu, G. (2014) The Time Decay of Bond Premium and Discount—An Analysis of the Time Passage Effect on Bond Prices. Theoretical Economics Letters
, 323-330. doi: 10.4236/tel.2014.45043
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