Return on selling before maturity
It is important to note that many investors sell their bonds before the redemption date. The price received depends on market conditions. If general interest rates have risen over the holding period, the bond could well be worth less than if market interest rates remained constant or declined.
This will have a depressing effect on the rate of return received even though coupons have been paid during the time the bonds were owned - see Example 13.4.Example 13.4
If an investor bought Bluebird's three-year bonds at £91 and sells them one year later when the rate of return on two-year bonds of this risk level in the market has risen to 10%, instead of receiving the original 9.59% yield to maturity he/she will achieve a rate of return of only 8.86% over the year of holding, as explained below:
After one year of holding there are only two cash inflows left owing to a buyer: £6 to be received in one year and £106 to be received in two years (£6 coupon plus £100 nominal value): 