The amount by which a bond’s price falls below its maturity value (i.e., par value). In other words, it is the amount an investor pays for a bond below its stated principal amount. Intrinsically, bond prices are linked to the interest rate prevailing in the market where a bond trades. The connection with interest rate is typically negatively correlated: bond prices fall as interest rates rise, and vice versa. Bond prices are determined in a way that investors can get a certain return on their bond holdings.
For example, if the price of a given bond is $950, while its maturity value is set at $1,000, the bond discount is:
Bond discount = bond price – par value
Bond discount = 950 – 1,000 = -$50
Bond discount comes into existence when the value of a bond has decreased below its par value due to increasing interest rates.
It is the opposite of a bond premium.
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