[Ohmykimb]

I’ve been lurking around a lot, many of you all have great ways to break information down. Can anyone let me know if I finally understand this?

A bond discount means the market rate is higher than the stated rate of the bond. In theory the investor will pay less towards the face value and the additional money received is paid back to the investor over the life of the bond. Meanwhile the issuer will recognize less face value.

A bond premium means the market rate is lower than the stated rate of the bond. In theory the investor is paying more towards the face value and the additional money received is paid back to the investor over the life of the bond. Meanwhile the issuer will recognize the full face value of the bond.

Do I finally have this right? If not please let me know what I still confusing. Thanks so much everyone!

Eff'ed around for a while, doing this for real now

[Biff-1955-Tannen]

Yes you have it right. The way I think about it is from the buyers prospective. If I can by a $1,000 bond that has a rate of 10% for $1,000, why would I pay $1,000 for this company's $1,000 bond that only offers 8%? The only way I would buy that is if they sold it to me at a discount. By me paying less for the bond and receiving the coupons of 8%, I'm effectively getting the 10% return

With premiums its just the opposite. Why would a company sell me their $1,000 bond with a stated 10% interest rate when everybody else is selling $1,000 bonds with 8% and getting $1,000. They don't want to pay out more interest if people are willing to accept lower rates (market rate). So they charge you a premium which allows them to effectively pay the market rate

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[jm962011]

bonds were difficult for me, not just the concept but the actual calculation. I'm pretty sure there is a free YouTube video where Roger explains it. It was like an hour long and really helped.

I was originally using Becker and I probably watched that video 100 times and still couldn't figure it out :-/

[Author]

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