A discount bond by contrast, has a coupon rate lower than the prevailing interest rate for that particular bond maturity and credit quality. An example may clarify this concept. When you sell it, your bond will be competing on the market with new bonds with a 5-year maturity, since five years is the time left until your bond matures. Because of this bidding-up process, your bond will trade at a premium to its par value.
What’s the Difference Between Premium Bonds and Discount Bonds?
Your buyer will pay more to purchase the bond, and that premium the buyer pays will reduce the yield to maturity of the bond, so it is in line with what is currently being offered. By contrast, a bond discount would enhance, rather than reduce, its yield to maturity. We always want to purchase bonds with the highest YTM, given equivalencies in maturity, credit worthiness, and industry.
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About Team Contact Client Login. The terms reflect the current market pricing, not the quality, of particular bonds. What is a Discount Bond? What Makes Them Different? The slowdown along with uncertainty around trade wars and Brexit is ramping up the pressure on the government to deliver a fiscal stimulus package.
Interest Rates and Bond Pricing
Germany previously sold a year zero-coupon bond in April — a move that is often noted as being the spark for a bund "tantrum" after a lack of interest in the sale led to a sell-off. However, Ralf Preusser, global head of rates strategy at Bank of America Merrill Lynch, said in a note last week that while there are "concerning parallels to today's market environment," there are also some "crucial differences. In contrast, the ECB has reopened the door to rate cuts without giving any indication of the new floor for the ECB deposit rate," Preusser said.
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He further highlighted that with the sale of the German year bond on Wednesday and the year bond on August 28, the risk is that at these yield levels, the German Finance Ministry will "eventually encounter a buyer's strike. Sign up for free newsletters and get more CNBC delivered to your inbox.
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