Disable ads (and more) with a premium pass for a one time $4.99 payment
A discount on a bond takes place when the market rate of interest exceeds the bond's stated interest rate. This situation arises because investors are seeking higher returns from their investments; therefore, if a bond's interest payments are lower than what they could get elsewhere, the bond will be offered at a price lower than its face value to attract buyers.
When bonds are issued at a discount, they typically provide a yield that aligns with current market conditions, making them more appealing. The difference between the face value of the bond and its discounted selling price is amortized over the life of the bond, impacting the interest expense recorded by the issuing company.
The scenario where the stated rate equals the market rate leads to bonds being issued at face value, while paying more than the face value indicates a premium bond situation. Lastly, the maturity of the bond does not in itself determine whether a discount occurs; it simply indicates that the bond's principal is due to be repaid.