We used classical molecular dynamics simulation to study the ferrite–austenite phase transformation of iron in the vicinity of a phase boundary to cementite. When heating a ferrite–cementite bicrystal, we found that the austenitic transformation starts to nucleate at the phase boundary. Due to the variants nucleated, an extended poly-crystalline microstructure is established in the transformed phase. When cooling a high-temperature austenite–cementite bicrystal, the martensitic transformation is induced; the new phase again nucleates at the phase boundary obeying the Kurdjumov–Sachs orientation relations, resulting in a twinned microstructure.