WHAT ARE BOND DISCOUNTS AND PREMIUMS?

Bonds can be bought and sold on the secondary market before they reach maturity.  The price you can get for a bond before it matures is known as its market price. When the market price of a bond goes above its face value, it is said to be a premium bond.  When the market price is below its face value, it is known as a discount bond.  If you buy a bond at premium, you get only the face amount when the bond reaches maturity.  For example, if you pay $1,300 for a bond with a par of $1,000, you still get only $1,000 when it reaches maturity.  If you buy at a discount, then at the bond's maturity you are repaid the par value, which is more than the purchase price.  For example, if you pay $900 for a bond, at maturity you are paid the par value, $1000. In order to determine whether a bond is selling at a discount or a premium, you need to look at a bond table.  A bond table lists the bond's coupon rate, its maturity rate, daily bid and ask prices, and yield-to-maturity.  The bid price is the highest price a buyer is willing to pay for a bond.  The ask price is the lowest price a seller is willing to sell it for.

Prices in the bid and ask columns represent a percentage of a bond's $1,000 face value.  For example, a bid price of 110 means a buyer is willing to pay $1,100 for a $1,000 bond.  This indicates that the bond is selling for a premium.  If you bought the bond at par value, you could sell it now and make a profit of 10 percent.  If the price is below 100, the bond is selling at a discount and the bond's yield-to-maturity will be higher than its coupon rate.  The "Close" column of the table shows you the last price the bond traded at that day.

Bond prices fluctuate based on a wide variety of factors.  You will learn about these factors next.