Bond Discount

Bond discount is the difference amount by which the market value of a bond is below its par value. The main features of a bond are its par value, market value and coupon rate. The issuer of the bond makes interest payments to the purchaser/ current holder of the bond as compensation for the amount received against the bond for a fixed period of time. Some of the bonds are sold at face value, discount or premium.

A bond that is issued at discount has its par value more than its market value, creating a capital appreciation upon the maturity of the bond since the higher par value is paid when the bond matures.

For example, a bond with face value of $100 that is trading at $98 has a bond discount of $2. The bond discount is also used with reference to the bond discount rate, which is the rate of interest that is used to price bonds through present value calculations.

 

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