Bond Discount

AAA

DEFINITION of 'Bond Discount'

The amount by which the market price of a bond is lower than its principal amount due at maturity. This amount, called its par value, is often $1,000. As bond prices are quoted as a percent of face value, a price of 98.00 means that the bond is selling for 98% of its face value of $1,000.00 and the bond discount is 2%.

INVESTOPEDIA EXPLAINS 'Bond Discount'

Bonds trade at a discount to par value for a number of reasons. Bonds on the secondary market with fixed coupons will trade at discounts when market interest rates rise. While the investor receives the same coupon, the bond is discounted to match prevailing market yields. Discounts also occur when bond supply exceeds demand, when the bond's credit rating is lowered, or when the perceived risk of default increases. Conversely, falling interest rates or an improved credit rating may cause a bond to trade at a premium.

RELATED TERMS
  1. Par Value

    The face value of a bond. Par value for a share refers to the ...
  2. Effective Interest Method

    The practice of accounting for the discount at which a bond is ...
  3. Net Interest Cost (NIC)

    A mathematical formula that an issuer of bonds uses to compute ...
  4. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  5. Bond Rating

    A grade given to bonds that indicates their credit quality. Private ...
  6. Discount

    The condition of the price of a bond that is lower than par. ...
Related Articles
  1. Junk Bonds: Everything You Need To Know
    Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

  2. Understanding Bond Prices and Yields
    Bonds & Fixed Income

    Understanding Bond Prices and Yields

  3. Climb The Bond Ladder To Higher Income
    Bonds & Fixed Income

    Climb The Bond Ladder To Higher Income

  4. How Bond Market Pricing Works
    Bonds & Fixed Income

    How Bond Market Pricing Works

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center