Changing credit ratings and perceptions of the bond issuer's creditworthiness also play a role in individual bonds. Most investors buy bonds for current income and hold them till maturity.
Bonds 4: “Does it make any sense to buy a bond at a premium?”
Regardless of what you pay for a bond, at maturity you will get back its full face value. If you buy a discount bond, you will have a capital gain; if you buy a premium bond, you will have a capital loss. But you could also lose money in a discount bond and come out ahead with a premium bond. Suppose you buy a discount bond because it looks cheap, but it is cheap because the issuer is in financial trouble. If the issuer goes into bankruptcy, you stand to lose your entire investment.
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On the other hand, you could buy a premium bond instead of a certificate of deposit if the amount of interest you collect, less the capital loss at maturity, would still be more than the CD interest. Based in San Diego, Slav Fedorov started writing for online publications in , specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker.
Now working as a professional trader, Fedorov is also the founder of a stock-picking company. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm.
Visit performance for information about the performance numbers displayed above. Skip to main content. Bond Par Value vs. GNMA Taxation.
Bond Discount and Bond Premium
Tip 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. Video of the Day.
Those who want to investigate this issue more deeply can refer to this article from the New York Times. The premium or discount on a bond is not the only consideration when contemplating its purchase.
Premium Bond Definition
What are the risks of the specific bond? The Balance does not provide tax, investment, or financial services and advice.
Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
By Thomas Kenny. With this in mind, we can determine that:. 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. Continue Reading.