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. Bond Rating

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

    The condition of the price of a bond that is lower than par. ...
  6. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
Related Articles
  1. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  2. Bonds & Fixed Income

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  3. Bonds & Fixed Income

    Climb The Bond Ladder To Higher Income

    Whether it's learning how to ladder bonds or finding alternatives, investors seeking better returns need to be more active.
  4. Bonds & Fixed Income

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  5. Investing

    What does it mean when a bond is selling at a premium? Is it a good investment?

    When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of the bond is either above or below its par value. For example, if a bond ...
  6. Investing

    Are high-yield bonds better investments than low-yield bonds?

    Most bonds typically make periodic payments, known as coupon payments, to the bondholder. A bond's indenture, which will be known when the purchaser buys the bond, will specify the coupon payments ...
  7. Investing

    If the price of the bond falls, does that mean the company won't pay me the par value?

    When you buy a bond, you are loaning money to the issuer. Because a bond is a loan, the interest paid to the bondholder is payment for lending the money. The interest payable is stated as a percentage ...
  8. Investing Basics

    What is the effect of price inelasticity on demand?

    Find out why price inelasticity of demand shows the relationship between demand and price if the price of an inelastic good is either lowered or raised.
  9. Investing

    Reassessing Your Approach To Bond Investing

    Rethinking your fixed-income portfolio may not resonate in quite the same way as dropping 10 pounds or finally giving up that smoking habit.
  10. Mutual Funds & ETFs

    How much of my total assets should I be keeping in my money market account?

    Investing a portion of total assets in a cash position such as a money market account provides investors access to funds in the case of an emergency.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center