Discount

What is a 'Discount'

In finance, discount refers to the condition of the price of a bond that is lower than par, or face value. The discount equals the difference between the price paid for a security and the security's par value.

BREAKING DOWN 'Discount'

For example, if a bond with a par value of $1,000 is currently selling for $990 dollars, it is selling at a discount of 1%, or $10. The reason for the discount is that it has a lower interest rate than the market value—in other words, since it's not paying as high of an interest rate to the holder, it must be sold at a lower price to be competitive, or else no one would buy it. This interest rate, known as a coupon, is generally paid on a semiannual basis. The term coupon comes from the days of physical bonds (as opposed to electronic ones), when some bonds had coupons attached to them. Some examples of discount bonds include U.S. savings bonds and U.S. Treasury bills.

Stocks and other securities can similarly be sold at a discount. However, this discount is not due to interest rates; rather, a discount is usually implemented in the stock market in order to generate buzz around a particular stock, and the par value only specifies the minimum price the security can be sold for upon its initial entrance into the market.

Deep Discounts and Pure Discount Instruments

One type of discount bond is a zero-coupon bond, which doesn't pay interest but instead is sold at a deep discount. This discount amount is equal to the amount lost by a lack of interest payments. Zero-coupon bond prices tend to fluctuate more often than bonds with coupons.

A deep discount doesn't only apply to zero-coupon bonds; it is generally considered to apply to any bonds that are 20% below market value and beyond.

Another type of discount bond is a pure discount instrument. This bond or security pays nothing until maturity. This type of bond is sold at a discount, but when it reaches maturity, it pays the par value. For example, if you purchase a pure discount instrument for $900 and the par value is $1,000, you'll get $1,000 when the bond reaches maturity.

Discounts vs. Premiums

A discount is the opposite of a premium, which applies when a bond is sold for higher than par value. Using the above example, a premium occurs if the bond is sold at, for instance, $1,100 instead of its par value of $1,000. Conversely to a discount, a premium occurs when the bond has a higher interest rate than the current market value. To learn more about the payout on bonds in relation to discounts and premiums, see: If the price of the bond falls, does that mean the company won't pay me the par value?

RELATED TERMS
  1. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  2. Bond Discount

    The amount by which the market price of a bond is lower than ...
  3. Discount Note

    A short-term debt obligation issued at a discount to par. Discount ...
  4. Par Value

    The face value of a bond. Par value for a share refers to the ...
  5. Market Discount

    The difference between a bond's stated redemption price and its ...
  6. Accrued Market Discount

    The gain in the value of a discount bond expected from holding ...
Related Articles
  1. Bonds & Fixed Income

    Explaining Original Issue Discount

    An original issue discount is the amount below par at which a bond or other debt instrument is issued.
  2. Professionals

    Long-Term Liability Basics

    CFA Level 1 - Long-Term Liability Basics. Learn the basics of long-term debt by examining corporate bonds. See what determines if a bond is to sell at a discount or premium.
  3. Professionals

    Price Terms

    FINRA Series 6 Exam Study Guide - Price Terms. Discusses the important terms that apply to securities markets and bond pricing.
  4. Professionals

    Bond Pricing

    Once issued, corporate bonds trade in the secondary market between investors similar to the way equity securities do. The price of bonds in the secondary market depends on all of the following: ...
  5. Professionals

    Bond Pricing

    Once issued, corporate bonds trade in the secondary market between investors similar to the way equity securities do. The price of bonds in the secondary market depends on all of the following: ...
  6. Professionals

    Bond Value and Price

    CFA Level 1 - Bond Value and Price. Explains why a bond's value can change in relation to interest rates and time to maturity. Shows calculations for valuing a zero-coupon bond.
  7. Professionals

    Issuing Long-Term Debt

    This can be an OK move in the short fun, but it is not something that can be sustained forever.
  8. Professionals

    Bond Valuation

    We look at how to determine a bond's value based on its price and prevailing interest rates.
  9. Investing Basics

    What is Par Value?

    Par value is a term used for investments that means original value. It’s also called face value or nominal value.
  10. Professionals

    Forward Contracts on Bonds

    CFA Level 1 - Forward Contracts on Bonds. Learn the features of forward contracts on bonds. See how a bonds maturity, embedded options and default risk affect the forwards contract.
RELATED FAQS
  1. 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 ... Read Answer >>
  2. Will the price of a premium bond be higher or lower than its par value?

    Find out why the selling price of a premium bond is always higher than its par value, including how changing interest rates ... Read Answer >>
  3. What types of fees apply to checking accounts?

    Learn about the difference between a bond's coupon rate and its yield to maturity, and how the par value, coupon rate and ... Read Answer >>
  4. Can the marginal propensity to consume ever be negative?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the basic components of bonds and how ... Read Answer >>
  5. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  6. How can I calculate the carrying value of a bond?

    Learn what the carrying value of a bond means, how it can change and the easiest way to calculate a bond's carrying value ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center