A premium bond has a coupon rate higher than the prevailing interest rate for that bond maturity and credit quality. A discount bond, in contrast, has a coupon rate lower than the prevailing interest rate for that bond maturity and credit quality. An example may clarify this distinction.
How do you tell if a bond is sold at a premium or discount?
A bond trades at a premium when its coupon rate is higher than prevailing interest rates. A bond trades at a discount when its coupon rate is lower than prevailing interest rates.
Why would a bond be sold on a premium or discount?
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. Investors are willing to pay more for a creditworthy bond from the financially viable issuer.
What does the fact that a bond sells at a discount or at a premium tell you about the relationship between RD and the bond’s coupon rate?
When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of the bond is either above or below its par value. … Bonds can be sold for more and less than their par values because of changing interest rates.
Why is a bond issued at a discount?
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. … If the bond’s value falls below par, investors are more likely to purchase it since they will be repaid the par value at maturity.
How do you check premium bonds?
Your Premium Bonds are grouped under a single holder’s number. This number has 10 or 9 digits, or 8 digits followed by a letter. You can find your holder’s number by logging in to our online service and checking your Premium Bonds account page. Or you can call us for a replacement Bond record and we’ll sent it to you.
When bonds are issued at a premium?
When a bond is issued at a premium, that means that the bond is sold for an amount greater than the bond’s face value. This generally means that the bond’s contract rate is greater than the market rate.
What is a premium bond?
What are Premium Bonds. Premium Bonds are an investment product issued by National Savings and Investment (NS&I). Unlike other investments, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win between £25 and £1 million tax free.
How do premium bonds work?
What are Premium Bonds? NS&I Premium Bonds are a savings account you can put money into (and take out when you want), where the interest paid is decided by a monthly prize draw. You buy £1 bonds and each has an equal chance of winning, so the more you buy, the more your chances improve.
Which of the following is correct for a bond currently selling at a premium to par?
Which of the following is correct for a bond currently selling at a premium to par? Its current yield is lower than its coupon rate.
When a bond sells at a premium the contract rate is?
When bonds are issued at a discount, its coupon rate or contract rate is lower than the market rate. When bonds are issued at a premium, its coupon rate or contract rate is higher than the market rate.
When a bond is sold at a premium the carrying value will?
When a bond is issued at a premium, the carrying value is higher than the face value of the bond. When a bond is issued at a discount, the carrying value is less than the face value of the bond. When a bond is issued at par, the carrying value is equal to the face value of the bond.
When a bond sells at premium interest expense will be?
When a bond sells at a premium, interest expense will be: less than the bond interest payment.
What is an example of a discount bond?
Bonds that trade at a value of less than face value would be considered a discount bond. For example, a bond with a $1,000 face value that’s currently selling for $95 would be a discounted bond. Since bonds are a type of debt security, bondholders or investors receive interest from the bond’s issuer.
What does it mean to be issued at a discount?
Definition. The term bonds issued at a discount refers to newly issued debt that is sold at a price which is less than its par value. When a bond is issued at a discount, the company will typically choose to amortize the discount over the term of the bond using a straight line method.
How do you record a bond issued at a discount?
If there was a discount on bonds payable, then the periodic entry is a debit to interest expense and a credit to discount on bonds payable; this has the effect of increasing the overall interest expense recorded by the issuer.