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  • When bonds sell for less than their face value, they are said to be selling at a discount.

    Bonds sell at a discount when the interest rate they pay is lower than the rate on more recently issued bonds or when the financial condition of the issuer weakens.

    In the case of rising interest rates, demand for older, lower-paying bonds drops as investors put their money into newer, higher-paying alternatives, so the prices of the older bonds drop. If a rating agency reduces a bond's rating, the market price tends to drop because investors demand a higher yield for the additional risk they take in buying the bond.

    Similarly, closed-end mutual funds may trade at a discount to their net asset value (NAV) as a result of weak investor demand or other market forces. Preferred stocks may also trade at a discount.

    In contrast, certain bonds, called original issue discount bonds, or deep discount bonds, are issued at a discount to par value, or full face value, but are worth par at maturity.

  • Browse Related Terms: bear market, Buyback, Currency swap, Discount, Disinflation, Interest Rate Risk, Matrix trading, Swap