Bond Discounts and Premiums

Bond Discounts and Premiums

Bonds can be bought and sold on the secondary market before they reach maturity. The price you can get for a bond before it matures is known as its market price.

How discounts and premiums work

When the market price of a bond goes above its face value (par), it is said to be a premium bond. When the market price is below its face value, it is known as a discount bond. If you buy a bond at premium, you get only the face amount when the bond reaches maturity. For example, if you pay $1,300 for a bond with a par of $1,000, you still get only $1,000 when it reaches maturity. If you buy at a discount, then at the bond’s maturity you are repaid the par value, which is more than the purchase price. For example, if you pay $900 for a bond, at maturity you are paid the par value, $1000. In order to determine whether a bond is selling at a discount or a premium, you need to look at a bond table. A bond table lists the bond’s coupon rate, its maturity rate, daily bid and ask prices, and yield-to-maturity. The bid price is the highest price a buyer is willing to pay for a bond. The ask price is the lowest price a seller is willing to sell it for.

How the bond tables work

Prices in the bid and ask columns represent a percentage of a bond’s $1,000 face value. For example, a bid price of 110 means a buyer is willing to pay $1,100 for a $1,000 bond. This indicates that the bond is selling for a premium. If you bought the bond at par value, you could sell it now and make a profit of 10 percent. If the price is below 100, the bond is selling at a discount and the bond’s yield-to-maturity will be higher than its coupon rate. The "Close" column of the table shows you the last price the bond traded at that day.