Bond Discount


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%.

BREAKING DOWN '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.

  1. Coupon

    The annual interest rate paid on a bond, expressed as a percentage ...
  2. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  3. Par Value

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

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

    A mathematical formula that an issuer of bonds uses to compute ...
  6. Bond Rating

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