How Are Bond Prices Affected by Coupon Payment Dates?
Does a bond experience the inverse of the price deterioration seen on an option, the closer it is to a coupon date?
For example, suppose you purchase a $1,000 bond with a 10% coupon, which pays $50 a year in two installments on June 15 and Dec. 15. If the bond is trading at par (100 cents on the dollar), does it experience a natural growth toward 105 as it approaches a payment date?
-- Gordon Shephard
Gordon,Your logic is impeccable, but no, that's not how it actually works. You correctly assume that if a bond changes hands a certain number of days after its last coupon payment, the seller should get whatever portion of the next coupon payment he is entitled to, based on how long he held the bond.
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