Bond Pricing and Discounts

Quotation of Bond Prices

• Bond prices are quoted as a percentage of the face value.

• Example price quotations can be 98, 97, 96, etc.

Homework Problems

• Homework problems may provide a bond price (e.g., 98, 97, 96).

• Students must calculate the proceeds from the bond issue.

  • Calculation method: Multiply the price percentage (in decimal) by the total face value of the bonds issued.

  • Formula:

  • Proceeds = (Bond Price Percentage / 100) x Face Value x Number of Bonds

Discount on Bonds

• When a bond is sold for less than its face value, it is referred to as a "discount."

• Example of discount:

  • If the bond sells for $9.70 with a face value of $1000, this is a discount because it is below the face value.

• Accounting for discounts will be covered in further detail.

Bonds Selling Above Face Value

• When a bond is sold for more than its face value, it is referred to as selling at a premium.

• Example of selling at a premium:

  • If a bond sells for $1,010, this represents 101% of the face value.

  • Selling above the face value indicates a premium bond.

Definitions

• Bond Price Quotation: The price of a bond expressed as a percentage of its par (or face) value.

• Discount: Occurs when a bond is sold for less than its face value.

• Premium: Occurs when a bond is sold for more than its face value.