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What is Premium/Discount?

What is Premium/Discount?


Bonds are sold under three classifications:

1.    Par Bond: A bond sold at its face value (i.e., pay $100 for a $100 bond)

2.   Premium Bond: A bond that is sold above its par value (i.e., pay $125 for a $100 bond)

3.   Discount Bond: A bond that is sold below its par value (i.e., pay $85 for a $100 bond)

When bonds are originally issued, they are sold as par, premium, or discount bonds. A bond’s par value is the same as its face value, which is the amount the bond issuer will pay to investors when the bond reaches maturity. 

The chart below shows a bond issuance with five maturities that are sold as either par bonds (2026), discount bonds (2027, 2028), or premium bonds (2029, 2030): 

Premium Discount Example



Suppose an agency needs $1,000,000 to fund maintenance expenses. To fund the expense, the agency plans to sell 10-year bonds with a face value of $1,000,000 at a coupon of 3.00% to yield approximately 4.24%. In the current market, based on the coupon and yield, the price of the bond would be $90 per $100 face value (i.e., a discount bond), producing only $900,000.

Since the agency needs $1,000,000, they will actually have to sell $1,115,000 of face value of bonds to offset the discount on the bonds in order to receive $1,000,000 in cash to fund the expense.

What’s important here?

Bonds are sold as either par, premium, or discount bonds. Whether a bond is issued as a par, premium, or discount bond depends on the coupon rate of the bond compared to what the yield on the bond is.