Buying bonds (premium vs discount)

For new investors the process of buying bonds can be complex as it involves various terminologies and buying scenarios. Today we will discuss buying bonds at a premium versus a discount. Let’s start at the beginning. When a bond is issued it is available for purchase at its face value, which is the amount of money the issuer promises to repay bondholders at maturity. The face value of a bond is fixed and is also known as the par value.

Buying Bonds at Premium

Once the bond is available in the market it begins trading at a premium or discount, depending on the market interest rate and bond coupon rate. When you buy a bond at a premium in the secondary market you pay a price higher than its par value (original price). Bonds trade at a premium compared to their par value when the coupon offered on the bond is higher than the prevailing market interest rate. As a result, potential investors would be willing to pay a higher amount to secure a higher interest rate.