CandleFocus Glossary Editor
Bond discount is an effective way for governments and companies to raise funds by issuing bonds at below face value. Banks may also use bond Discounts to increase loan deposits when current market interest rates are higher than the coupon rate of an existing bond. The bond Discount is paid to investors by the issuer, creating an effective yield above the coupon rate.
A bond discount is the amount by which the market price of the bond is lower than its principal (or face) value. This occurs when the current interest rate is higher than the coupon rate on the bond, making it less attractive to investors. As a result, the bond’s market price drops below its face value, so that the investor will receive back a higher face value when the bond matures.
The size of the bond discount can vary depending on the maturity of the bond, the type of bond, and the coupon rate. For instance, a bond issued at a bond discount will have a lower maturity value than a bond issued at par, and so the bond discount will be larger. Similarly, zero-coupon bonds are generally sold at bond discounts since more risk is associated with them as compared to coupon bonds.
When market interest rates are higher than the coupon rate of an existing bond, it causes higher risk for the bondholders since the bond will have limited capital appreciation over time. The bond Discount is used as a type of compensation for this risk and is paid to the bondholders by the issuer, making it attractive for investors. The bond Discount is also used in leveraged buyouts, where the bond Discount provides more cash to the bondholders up front, making them more likely to take the deal.
For investors, the size of the bond Discount can be an influential factor in deciding whether they want to buy the bond. To calculate the bond Discount, investors need to subtract the market price of the bond from its face value and then divide by the face value. The higher the bond Discount, the greater the potential return on the bond; however, a large bond Discount also indicates high risk, so investors should weigh the associated risks before deciding to invest.
A bond discount is the amount by which the market price of the bond is lower than its principal (or face) value. This occurs when the current interest rate is higher than the coupon rate on the bond, making it less attractive to investors. As a result, the bond’s market price drops below its face value, so that the investor will receive back a higher face value when the bond matures.
The size of the bond discount can vary depending on the maturity of the bond, the type of bond, and the coupon rate. For instance, a bond issued at a bond discount will have a lower maturity value than a bond issued at par, and so the bond discount will be larger. Similarly, zero-coupon bonds are generally sold at bond discounts since more risk is associated with them as compared to coupon bonds.
When market interest rates are higher than the coupon rate of an existing bond, it causes higher risk for the bondholders since the bond will have limited capital appreciation over time. The bond Discount is used as a type of compensation for this risk and is paid to the bondholders by the issuer, making it attractive for investors. The bond Discount is also used in leveraged buyouts, where the bond Discount provides more cash to the bondholders up front, making them more likely to take the deal.
For investors, the size of the bond Discount can be an influential factor in deciding whether they want to buy the bond. To calculate the bond Discount, investors need to subtract the market price of the bond from its face value and then divide by the face value. The higher the bond Discount, the greater the potential return on the bond; however, a large bond Discount also indicates high risk, so investors should weigh the associated risks before deciding to invest.