What is a bond called when it is trading below its par value?

What is a bond called when it is trading below its par value?

• A. Premium bond
• B. Par bond
• C. Discount bond
• D. Callable bond

Answer: (C)

A bond trading below its par value is known as a discount bond. When investors purchase such bonds, it indicates that the market price of the bond is lower than its face value, typically due to factors such as rising interest rates or perceived risk associated with the issuer. For example, if a bond has a par value of $1,000 and is trading at $950, it is considered a discount bond. Investors are often attracted to discount bonds because they can potentially offer a higher yield, as the investor will receive the full par value at maturity plus the interest payments during the bond's life. In contrast, a premium bond is one that trades above its par value, a par bond trades at its nominal value, and a callable bond is one that can be redeemed by the issuer before its maturity date. Each of these terms represents different characteristics and pricing situations in the bond market, which helps investors make informed decisions based on their investment strategies.

A bond trading below its par value is known as a discount bond. When investors purchase such bonds, it indicates that the market price of the bond is lower than its face value, typically due to factors such as rising interest rates or perceived risk associated with the issuer.

For example, if a bond has a par value of $1,000 and is trading at $950, it is considered a discount bond. Investors are often attracted to discount bonds because they can potentially offer a higher yield, as the investor will receive the full par value at maturity plus the interest payments during the bond's life.

In contrast, a premium bond is one that trades above its par value, a par bond trades at its nominal value, and a callable bond is one that can be redeemed by the issuer before its maturity date. Each of these terms represents different characteristics and pricing situations in the bond market, which helps investors make informed decisions based on their investment strategies.