A bond or other debt instrument that is issued at a price below its face value. For example, a bond with par of $10,000 might be issued to an investor for $7,000. All zero-coupon bonds are original issue discount debt.

Is a bond discount good or bad?

The discount bond’s coupon payments are lower than the premium bond’s payments, and as a result, we are better off with the premium bond in this case. Higher coupons or cash flows from premium bonds may shield the investor against rising interest rates or inflation, making the bond’s price less volatile.

Are bonds issued at par?

Are Bonds Issued at Par Value? Bonds are not necessarily issued at their par value. They could also be issued at a premium or at a discount depending on the level of interest rates in the economy.

Can a bond be issued at premium?

A bond that’s trading at a premium means that its price is trading at a premium or higher than the face value of the bond. For example, a bond that was issued at a face value of $1,000 might trade at $1,050 or a $50 premium. Even though the bond has yet to reach maturity, it can trade in the secondary market.

How do discount bonds work?

A bond issued at a discount has its market price below the face value, creating a capital appreciation upon maturity since the higher face value is paid when the bond matures. Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond.

What happens to the value of a discount bond?

However, the value of the bond is likely to increase or decrease with changes in the market interest rates. If interest rates go up, it results in a decline in the value of the bond. The bond must, therefore, sell at a discount. Hence the name, discount bond.

What is a coupon rate on a bond?

Coupon Rate A coupon rate is the amount of annual interest income paid to a bondholder, based on the face value of the bond. that is identical to the market interest rate.

Why are short term bonds trading at a discount?

Conversely, falling interest rates or an improved credit rating may cause a bond to trade at a premium. Short-term bonds are often issued at a bond discount, especially if they are zero-coupon bonds. However, bonds on the secondary market may trade at a bond discount, which occurs when supply exceeds demand.

What do you mean by original issue discount?

An original issue discount (OID) is the discount in price from a bond’s face value at the time a bond or other debt instrument is first issued. Bonds can be issued at a price lower than their face value—known as a discount. The OID is the amount of discount or the difference between the original face value and the price paid for the bond.