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I thought that there is something between 1 & 2, such as the financial condition of the company deteriorates(e.g. a downgrade of rating?) such that the original yield does not warrant the risk any more, simply, the investors are asking for higher yield, which result in the decline in bond price. It is not necessary that til the financial condition worsen to "distress", the price will plunge and the yield will jump. Before that, slowly, the price will decline and the yield is rising.
the discount to par is necessarily because the bond holders are not expecting to be paid in full. It could be also that it takes higher yield to hold the bond to maturity(the risk is high, but not necessarily in default).
the same can be said to the premium above par. It is not that bond holders are expecting payout more than par(it will not happen). It is more about the perceived risk is lower.
the discount to par is necessarily because the bond holders are not expecting to be paid in full. It could be also that it takes higher yield to hold the bond to maturity(the risk is high, but not necessarily in default).
the same can be said to the premium above par. It is not that bond holders are expecting payout more than par(it will not happen). It is more about the perceived risk is lower.