Explain in a paragraph of about 100-150 words when and why would a bond be sold on a premium or discount? You may use graphs, equations, or other aids to assist your explanation.
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Bonds are sold on premium when the coupon or interest rate is comparatively higher than market rate while they are sold on discount when the coupon price or interest rate of the bond is lower than the market rate.
Step-by-step explanation:
- Bonds are a means of raising money for the company and the government. The money raised from bonds comes under the category of debt. The company raises money from bonds from time to time to expand its business.
- Whenever a company needs credit, it issues bonds. On this, fixed interest rate is offered to the investors. If you get a bond with a face value of Rs. 100 which you find expensive in the open market, then it will be said that the bond is selling at a premium, while if you get it cheaper than the market prices, it is being sold at a discount.
- A bond is considered a discount bond when it has an interest rate lower than the current market rate and, as a result, is sold at a lower price.
- The Premium bond is the opposite of discount bond which are issued when the market price of a bond is higher than its face value. To compare the two in the current market, and convert the prices of older bonds to their value in the current market, you can use a calculation of yield till maturity.
Learn more: Bonds
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