BOND DISCOUNT
Back to GlossaryDefinition
The amount by which a bond’s price is below par; arises when coupon is below market yields.
Summary
A bond discount occurs when a bond sells for less than its face value (par value). This happens when the bond's fixed coupon rate is lower than the current market interest rates that investors expect for similar bonds. Since the bond pays less interest than what's available elsewhere, investors will only buy it at a reduced price to compensate for the lower return. The discount represents the difference between the par value and the actual selling price.
Usage Context
Essential when learning about bond valuation, understanding how interest rate changes affect bond prices, calculating investment returns, and making fixed-income investment decisions.
Common Confusions
- Thinking that buying at a discount means losing money
- Confusing bond discount with bond default or poor credit quality
- Not understanding that discounts can occur even with high-quality bonds
- Mixing up the relationship between interest rates and bond prices
- Assuming the discount is permanently lost rather than recovered at maturity
