Originally Posted by

**SerOga**
DON'T FORGET ABOUT TIME MONEY VALUE (TMV)

To get this cash flow you should invest some amount at time 0 (PV or bond price)

PV=1500*v + 1500*v^2 + 1500*v^3 + 1500*v^4 + 11500*v^5.

You can check that, for

i=10% PV=11895.3934; (bond price is more that 10000)

i=15% PV=10000; (bond price is equal that 10000)

i=20% PV=8504.6939 (bond price is less that 10000)

You can see that this investment matches with 10,000 only when interest rate equals coupon rate. Why?

What is bond? It is money lending.

Let say you lend 10000 at i=15%. Bond pays your interest every year.

year 1: 1500, year 2: 1500, year 3: 1500, year 4: 1500, year 5: 1,500 + return your 10,000. Everybody is happy.

Let say i=20%, you should get as interest 2000, but bond still pays you every year 1500. Of course, you don't want this deal, so you want pay less.

Let say i=10%, you should get as interest 1000, but bond still pays you every year 1500. Now, bond owner doesn't want this deal, so you should pay more.

Therefore, general rule about interest rate and coupon rate.