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Question:

Why we don't purchase bond when the market price is higher than fair price?
 
 

Answer:

Bonds are not purchased when the market price is higher than the fair price of the bond due to the fact that bond is a fixed interest bearing security and therefore has a less amount of liquidity. If the market price of the bond increases then it suggests that there exists volatility in the market, which may lead to rise in risks. Share has an increased amount of liquidity and hence when the bond is available at the fair price, then the bond can be purchased at this rate rather than the market price. This can be fundamental for the making earnings with the help of capital gains for the bond. The availability of market volatility leads to fall and rise in the market price of the bond and hence in order to gain a fixed income bonds are purchased at the fair price rather than at the market price. 

 

Bibliography

Becker, B. and Ivashina, V., 2015. Reaching for yield in the bond market. The Journal of Finance, 70(5), pp.1863-1902.

Bodie, Z., 2013. Investments. McGraw-Hill.

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