Bond Discount

Published Aug 4, 2023

Definition of Bond Discount

A bond discount is the difference between the face value of a bond and its market price. That means it is the amount by which the market price of a bond is lower than its face value. Bond discounts are usually expressed as a percentage of the face value.

Example

To illustrate this, let’s look at a bond with a face value of $1,000 and a market price of $950. In this case, the bond discount is $50, which is 5% of the face value. That means the bond is trading at a 5% discount to its face value.

Bond discounts can occur for a variety of reasons. For example, if the bond has a low credit rating, investors may be unwilling to pay the full face value for it. In addition, if the bond has a long maturity, investors may be unwilling to tie up their money for such a long period of time.

Why Bond Discount Matters

Bond discounts are important for investors because they represent an opportunity to buy a bond at a lower price than its face value. That means investors can buy a bond at a discount and then sell it at a profit when the bond reaches its face value.

In addition, bond discounts can also be used to measure the riskiness of a bond. That is the higher the bond discount, the higher the risk associated with the bond. Thus, bond discounts are an important tool for investors to assess the risk-return profile of a bond.