What is a Discount Bond?
The discount is the difference between the purchase price of a bond and its stated redemption price at maturity. Investors purchasing a bond in the secondary market or bonds purchased at the original issue date as an original issue discount bond will derive their return from the coupon interest paid and from the difference between the purchase price and the redemption value. While most discounts are purchased in the secondary market (the after market of a new issue bond) some new issue bonds are issued at a discount. These discounts are termed “original issue discount” (OID). A market discount generally exists when a bond is purchased on the secondary market at a price below par. For the bond purchased at an original discount (OID), like a Zero-coupon, the discount is the difference between the purchase price and the issue price of the bond plus accreted OID. There may be tax implications involved in either case. We refer you to your Bernardi Investment Specialist for guidance relating
Discount bonds are bonds that sell for less than the face value of the bond. In many cases, a discount bond will also be a zero-coupon bond. Like many bond issues, a discount bond normally pays the original purchase price plus a fixed or variable amount of interest over the life of the bond. Understanding how a discounted bond functions is not difficult. Assuming that a bond has a face value of $2,000.00 and is sold for $1,800.00, it can be said that the bond sold for a discount of $200.00. The new owner of the bond can look forward to earning a return on both the principal and any interest that is generated according to the terms and conditions surrounding the bond issue. There can be several reasons why a discount bond may be available. One of the most common has to do with changes in market conditions that adversely impact the variable interest rate associated with the bond. The original buyer may determine that the return generated by the shift in interest rates is only going to co
