How Do You Calculate A Bond Discount?
Bonds are one vehicle to invest money. An investor can buy a bond and he will receive periodic interest payments and when the bond matures, receive the face value of the bond. When a bond hits the secondary market, there may be a difference between the market’s interest rate and the bond’s stated interest rate. If the market rate is greater than the stated rate, then the bond will sell for a discount, also known as selling below par. Bond prices are expressed as percentages such as 88, 100 or 103. Multiply the bond price times the par price of the bond to determine the amount the investor pays for the bond. For example, if a bond is selling for 97 and has a par value of $100,000 that matures in three years then $100,000 times 97 percent equals $97,000. Subtract the par value from the amount paid to determine the amount of discount. In the example, $100,000 minus $97,000 equals a $3,000 discount. Amortize the discount over the life of the bond. In the example, $3,000 divided by three ye
