Bonds & rates
Discount and premium
A bond trading below face value is at a discount; above face value, at a premium.
How it works
A bond issued when rates were low trades at a discount once rates rise, because its coupon is now uncompetitive. The discount is the market equalising its yield with newer bonds.
The reverse produces a premium: an old high-coupon bond in a low-rate world is worth more than par.
Related terms
- Face valueThe amount a bond repays at maturity, and the amount its coupon is calculated on.
- Yield to maturityThe total annual return from holding a bond to maturity, counting coupons and any price gain or loss.
- Interest-rate riskThe risk that rising interest rates reduce the market value of bonds you already hold.
Mentioned in
More in Bonds & rates
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.