Free tools Windows power users keep installed
One-click scans. No signup required.
A bond trades at a premium when its market price is above its face value (also called par), and at a discount when its price is below par. The label describes price—not whether the bond is a bargain. To judge an investment, compare its yield and cash flows alongside maturity, credit risk, call terms, taxes, trading costs, and how well it fits your plans.
What premium and discount mean
Face value is the amount the issuer promises to repay at maturity, assuming it meets its obligation. A bond’s market price can differ from that amount while the bond is being traded. The SEC’s Investor.gov corporate-bond guide describes bonds trading above or below face value.
| # | Preview | Product | Price | |
|---|---|---|---|---|
| 1 |
|
Premium Bonds (Great Brand Stories) | $58.33 | Buy on Amazon |
| 2 |
|
James Bond Destinations | $120.00 | Buy on Amazon |
| 3 |
|
Premium Bonds: The Complete Beginner's Guide (YAT Finance Guide Series Book 1) | $6.73 | Buy on Amazon |
| 4 |
|
James Bond girls | $88.99 | Buy on Amazon |
| 5 |
|
Practice Makes Perfect: Complete Spanish Grammar, Premium Fourth Edition | $12.49 | Buy on Amazon |
- Premium: market price is greater than face value.
- At par: market price equals face value.
- Discount: market price is less than face value.
For example, if a bond has $1,000 face value, a price of $1,100 is 110% of face value and is a premium; $900 is 90% and is a discount. Bond prices may be quoted in dollars or as a percentage of face value. Check the trade details to see whether the stated price is separate from accrued interest, fees, or other settlement costs.
Coupon rate and yield to maturity are different
The coupon rate is the stated annual interest rate applied to the bond’s face value. It determines the scheduled coupon payment; paying more or less than face value does not, by itself, change that payment. Many bonds pay interest twice a year. For a $1,000 bond with a 4% coupon paid semiannually, the payment is $20 every six months, or $40 over a year.
#1 Best Overall
Yield to maturity (YTM) estimates the annualized return implied by the price paid and the bond’s scheduled cash flows through maturity, including repayment of face value, assuming the issuer pays as promised and the bond is held to maturity. Because price is part of that calculation, the same bond’s YTM changes when its market price changes. YTM is an estimate based on assumptions, not a guaranteed realized return if you sell early or the issuer fails to pay.
SEC example: same bond, different prices and yields
The SEC’s Investor.gov uses an educational 10-year example in which each bond has $1,000 face value and a 4.00% coupon. Only the price changes. The yields below are example figures, not current market offers.
Rank #2
- By Daniel Pembrey (Author)
- 328 Pages
- Over 200 Illustrations
- Silk Hardcover
- Imported
| Example bond | Price | Price relative to face value | Coupon rate | Yield to maturity |
|---|---|---|---|---|
| A | $1,000 | At par | 4.00% | 4.00% |
| B | $900 | 90% (discount) | 4.00% | 5.31% |
| C | $1,100 | 110% (premium) | 4.00% | 2.84% |
With the same coupon and maturity, the lower purchase price gives the buyer a higher YTM in this example, while the higher price gives a lower YTM. The coupon remains tied to face value: all three bonds pay the same scheduled coupon. The difference is what the buyer pays for those cash flows and the face-value repayment at maturity.
Why bond prices and market rates often move in opposite directions
When market interest rates rise, an older fixed-rate bond’s coupon may look less attractive than the rates available on newly issued bonds, so its price generally tends to fall. When market rates fall, an existing higher coupon may become more attractive, so its price generally tends to rise. As price moves, the YTM available to a new buyer usually moves in the opposite direction, all else equal.
Recommended Free Tools
The SEC Office of Investor Education and Advocacy stated in a June 26, 2013 bulletin that market interest rates and bond prices generally move in opposite directions. Its illustration shows a 3% coupon Treasury bond priced at $1,082 with a 2% yield after market rates fall from 3% to 2%; in the paired example, when rates rise to 4%, the bond is shown at $925 with a 4% yield. These are illustrations of the relationship, not current quotes.
Rate changes do not affect every bond equally. Generally, longer-maturity bonds are more exposed to rate changes than comparable shorter-maturity bonds, and lower-coupon bonds are more sensitive than otherwise similar higher-coupon bonds. Actual prices also reflect credit quality, call or other options, liquidity, taxes, and market conditions, so the relationship is not a precise prediction for any one bond.
Rank #4
Is it better to buy a bond at a premium or a discount?
Neither label is automatically better. A discount may come with a higher YTM than an otherwise comparable bond, but it can also reflect higher perceived credit risk, an unattractive coupon, limited liquidity, or other terms. A premium bond may offer a lower YTM than the same bond at a lower price, yet could still suit an investor whose needs align with its cash flows and risks. Price alone does not explain why a bond trades where it does.
When comparing specific bonds, look beyond the premium-or-discount label:
- Yield: Compare YTM after accounting for price, and understand its assumptions.
- Maturity and rate sensitivity: Consider when principal is due and how the bond may respond to changing rates.
- Issuer credit risk: Assess the possibility that interest or principal will not be paid as scheduled.
- Call or redemption provisions: Check whether the issuer can repay the bond early, which may change the cash flows you receive.
- Liquidity and trading costs: Consider how readily you can sell and whether a commission or broker markdown applies.
- Taxes: Review how interest, discounts, premiums, and any sale may be treated for your circumstances.
- Your time horizon and cash-flow needs: Match the bond’s payment schedule and maturity to when you may need the money.
What happens if you hold to maturity or sell early?
If you hold a bond to maturity and the issuer meets its obligation, you receive its face value when due. That payment may be more or less than what you paid: an investor who bought at a discount may receive more than the purchase price, while one who paid a premium may receive less than the purchase price. Coupon payments and the timing of cash flows also matter to the investment’s overall return.
If you sell before maturity, the sale price may be above or below par—and may differ from your purchase price. Your realized result depends on the amount you paid, coupons received, sale price, time held, any credit events, and transaction costs. Investor.gov notes that a bond sale may involve a commission or a broker markdown; ask the broker how the markdown works and compare costs before trading. Its bond information also explains that an early sale can produce proceeds above or below face value.
A U.S. Treasury guarantee, where applicable, concerns timely payment of principal and interest; it does not prevent the bond’s market price from falling before maturity. Corporate bonds carry issuer credit and default risk. A guarantee of scheduled payments should not be confused with protection from market-price changes.
Zero-coupon bonds are a special case
Zero-coupon bonds make no periodic coupon payments and are normally issued or purchased at a discount to face value. If the issuer meets its obligation, the investor receives face value at maturity. The difference between the purchase price and face value is not the same as a stream of regular coupon checks.
For some zero-coupon bonds, tax rules may treat interest as accruing before the investor receives the maturity payment. Investor.gov warns that imputed interest can have tax consequences before maturity; treatment depends on the instrument and the investor’s circumstances. Do not assume all zero-coupon securities have identical tax treatment. See the SEC’s bond education page and consult a qualified tax professional for advice about a specific holding.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
