A bond selling for an amount above face value is said to be selling at a discount. True or False? | Homework.Study.com (2024)

FAQs

A bond selling for an amount above face value is said to be selling at a discount. True or False? | Homework.Study.com? ›

The statement is false.

A premium bond is a bond trading above its face value or costs more than the face amount on the bond. A bond might trade at a premium because its interest rate is higher than the current market interest rates. The company's credit rating and the bond's credit rating can also push the bond's price higher.

For example, a bond with a par value of $1,000 is selling at a premium when it can be bought for more than $1,000. Alternatively, a bond selling for less than $1,000 is discounted. A bond could also be discounted because its coupon rate is lower than the current market interest rates.

Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity. 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.

A bond that is priced above its face value is said to sell for. a premium.

Key Takeaways

Par value is the price at which a bond was issued, also known as its face value. A bond's price will then fluctuate based on prevailing interest rates, time to maturity, and credit ratings, causing the bond to trade either at above par or below par.

Discounted Bond is a bond that is issued or traded in the secondary market at a price below par (a discounted bond). Discount bonds can be: - troubled bonds, the issuer of which is on the verge of default, and payment of coupons and redemption is unlikely.

Above par refers to a bond price that is currently greater than its face value. Above par bonds are said to be trading at a premium and the price will be quoted above 100. Bonds trade above par as interest rates decline, as the issuer's credit rating increases, or when the bond's demand greatly exceeds supply.

Three factors that influence a bond's current price are the issuer's credit rating, market interest rates, and the time to maturity.

The price for a bond or a note may be the face value (also called par value) or may be more or less than the face value. The price depends on the yield to maturity and the interest rate. The "yield to maturity" is the annual rate of return on the security. In both examples, the yield is higher than the interest rate.

Is it better to buy bonds at a discount or premium? ›

Discount bonds can be riskier but the lower the price, the higher the potential for gains. Premium bonds can deliver higher returns with less risk, but they can be problematic if they become callable.

The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate. Bonds held for more than a year will be subject to potentially lower long-term capital gains rates.

A bond tends to trade at a lower price than its par value when interest rates prevailing in the market are higher than the coupon rate offered by the bond.

If the contract rate is less than the market rate, the bond will sell at an amount less than face (this is known as a discount). If the contract rate is greater than the market rate, the bond will sell at an amount greater than face (this is known as a premium).

If an investor purchases a bond at par or face value, the yield to maturity is equal to its coupon rate. If the investor buys the bond at a discount, its yield to maturity will be higher than its coupon rate. A bond purchased at a premium will have a yield to maturity lower than its coupon rate.