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Why are bond sometimes issued at a discount?
The reason bonds are sometimes issued at a discount is: the stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.
When a bond is issued at a premium, that means that the bond is sold for an amount greater than the bond’s face value. This generally means that the bond’s contract rate is greater than the market rate.
What was the bond premium or discount at issuance?
When a bond is first issued, it is a standard bond—never a premium bond or a discount bond. In other words, the price you pay for a new bond (its original price) is always fixed and is called the par value. A bond becomes “premium” or “discount” once it begins trading on the market.
Under what situation might a bond discount arise when issuing bonds?
Discount on bonds payable occurs when a bond’s stated interest rate is less than the bond market’s interest rate. If a $1,000,000 bond issue promises to pay interest of 8% per year and the bond market demands 8.125%, the bonds will sell for less than $1,000,000.
What is a pure discount bond?
Pure discount bond. A bond that will make only one payment of principal and interest. Also called a zero-coupon bond or a single-payment bond.
A bond selling at a premium is one that costs more than its face value, while a discount bond is one selling below face value. Usually, bonds with higher than current interest rates sell a a premium, while those with interest rates below prevailing rates sell at a discount.
Are bonds issued at par?
Are Bonds Issued at Par Value? Bonds are not necessarily issued at their par value. They could also be issued at a premium or at a discount depending on the level of interest rates in the economy.
What is the difference between a bond discount and a bond premium?
Bond Discount and Bond Premium. When the market interest rate is higher than a bond’s coupon rate, the bond sells at a price lower than its face value and the difference is called bond discount. A bond premium occurs when market interest rate is lower than the bond’s coupon rate and the bond sells at a price higher than the face value. As part…
The bond premium causes the interest expense to be lower than the interest payment such that the effective rate of interest is lower than the coupon rate. Bond discount and bond premium i.e. the difference between market price of the bond and face value decreases as the bond nears its maturity as illustrated by the following chart:
Why do bonds trade at a discount to par value?
During periods when interest rates are continually falling, bonds will trade at a premium so that the YTM moves closer to the falling interest rates. Similarly, rising interest rates will result in more bonds trading at a discount of par value. A bond may be issued at a discount for the following reasons:
Why is the price of a bond going up?
This situation arises when the stated interest rate on the face of the bond is higher than the market interest rate currently in existence. Thus, when investors see the higher interest rate being paid on the bond, they will bid up the price of the bond until the stated interest rate divided by the price paid equals the market rate.
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