Premium vs discount bond
Definition · Level 7 · Futures, rates & macro
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A bond priced above par because its coupon exceeds its YTM, or below par because its coupon is lower than its YTM. Both pull toward 100 as maturity nears, all else equal.
Example
6% coupon with yields at 4% trades above 100; a 2% coupon trades below.
Where Tradecraft teaches it
Level 7 · Futures, rates & macro, in the lesson “Bonds: price, yield & credit”: Par, coupon, YTM, the price–yield seesaw, the Treasury menu and credit ratings.
Related terms
- Bills, notes, bondsThe US Treasury maturity buckets: up to 1 year (zero-coupon, sold at a discount), 2–10 years, and 20–30 years (both with semiannual coupons).
- Bond credit spreadExtra yield a corporate or other risky bond pays over a Treasury of similar maturity, quoted in basis points: compensation for default and liquidity…
- Corporate bondDebt issued by a company. It yields a spread over the government bond of similar maturity to pay for default and liquidity risk, and is split by…
- CouponThe interest a bond pays, stated as an annual % of par; in the US usually paid in two semiannual installments.
- Credit ratingA letter grade from S&P, Moody’s or Fitch on an issuer’s ability to repay: AAA/Aaa at the top, BBB−/Baa3 the lowest investment grade, BB+/Ba1 and…
- Current yieldAnnual coupon ÷ market price: the cash-income return of a bond, ignoring the gain or loss as the price pulls to par at maturity.