Which is better discount bond or premium bond?

Asked By: MartiƱo Brun | Last Updated: 2nd March, 2020
Category: personal finance options
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A bond selling at a premium is one that costs more than its face value, while a discount bond is one selling below face value. Usually, bonds with higher than current interest rates sell a a premium, while those with interest rates below prevailing rates sell at a discount.

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Hereof, why do bonds sell at a premium or discount?

Why a Bond Trades at a Premium or a 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.

Beside above, should I buy bonds when interest rates are falling? If interest rates are falling, the bond fund must purchase new bonds at those lower rates. By comparison, while individual bonds may have the same market volatility as bond funds, as an individual bond approaches maturity its price will move closer to its face value and its volatility will decrease.

Thereof, why would you buy a bond at premium?

A person would buy a bond at a premium (pay more than its maturity value) because the bond's stated interest rate (and therefore its interest payments) are greater than those expected by the current bond market. It is also possible that a bond investor will have no choice. In short, the bond market is very efficient.

What is the effective interest rate on premium bonds?

The state-backed institution, which has a duty to balance the needs of savers, taxpayers and the wider market, will change the chance of a single Premium Bond winning a prize from 24,500/1 to 26,000/1. The effective annual interest rate on the deals will fall from 1.4 per cent to 1.3 per cent.

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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.

Do premium bonds go up in value?

Premium Bonds don't pay any interest. Instead your Bonds enter a monthly prize draw for a chance to win tax-free prizes. Remember that inflation can reduce the true value of your money over time. Any prizes you win are completely free of UK Income Tax and Capital Gains Tax.

Is Bond premium taxable income?

If you pay a premium to buy a bond, the premium is part of your basis in the bond. If the bond yields taxable interest, you can choose to amortize the premium. If the bond yields tax-exempt interest, you must amortize the premium. This amortized amount is not deductible in determining taxable income.

How does a premium bond 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.

Is a Discount Bond Good or bad?


The usual reason for a bond to be sold at a discount is the fixed interest rate is lower than what's being offered in the current market. You could score a 3% rate now while five years ago 7% was considered a good deal.

Why do companies issue bonds 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. Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond.

How do you calculate bond premium?

The total bond premium is equal to the market value of the bond less the face value. For instance, with a 10-year bond paying 6% interest that has a $1,000 face value and currently costs $1,080 in the market, the bond premium is the $80 difference between the two figures.

What is the current yield of a bond with a 6 coupon?

For example, if an investor buys a 6% coupon rate bond (with a par value of $1,000) for a discount of $900, the investor earns annual interest income of ($1,000 X 6%), or $60. The current yield is ($60) / ($900), or 6.67%. The $60 in annual interest is fixed, regardless of the price paid for the bond.

Why would you buy a bond?

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest twice a year. If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing.

Why do some bonds sell below face value?


When a bond trades below par, its current yield (coupon payment divided by market price) is higher than its fixed coupon rate. A bond may also trade below par if its credit rating is downgraded. This reduces the confidence level in the issuer's financial health, causing the value of the bonds to drop below par.

Is a bond premium a debit or credit?

The unamortized premium on bonds payable will have a credit balance that increases the carrying amount (or the book value) of the bonds payable. The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable.

What determines bond price?

The price of a bond is determined by discounting the expected cash flow to the present using a discount rate. Three primary influences on bond pricing on the open market are supply and demand, age-to-maturity and credit ratings.

What is the safest bond?

The Safest Bonds
Treasury bonds are sold by the federal government. Because they are backed by Uncle Sam, Treasurys have practically no default risk and are the safest bonds to buy. Short-term Treasurys are sold with maturities ranging from a few weeks to 30 years.

What happens at bond maturity?

When a savings bond matures, you get the principal amount plus all of the accrued interest. After the maturity date the bond stops earning interest. If you own paper savings bonds, you must present them at a bank or other financial institution for payment.

Is now a good time to buy bonds?


With bond prices high, now could be an opportune time to sell off riskier securities, such as higher-yield bonds, which—not unlike growth-oriented tech stocks—tend to be more volatile in bear markets. But now's also no time to chase higher returns by loading up on higher-risk, higher-yield junk bonds.

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.

What is the maximum amount of money you can put into premium bonds?

The maximum you can invest in Premium Bonds is £50,000. As NS&I is backed by the Treasury, this money is completely safe.