What determines whether a bond will be issued at a premium or a discount? What determines the coupon rate?

Answer 1

For the most part it depends on the market. If stockes are selling high they might sell a bond at a discount to encourage you to buy a bond instead of stock, or if they need money fast. They will sell it at a Premium if stockes are doing bad and they kow they have a better deal with their bonds. Coupon rate is set by the company issuing the bonds, 99% of bonds are sold for $1000 each and coupon rate ranges again depending on the company.

Answer 2

Bonds are not "issued" at a premium or a discount. They are issued (and redeemed) at their par value. After the bond is issued and begins trading on the secondary market, then it can trade for a premium or a discount. So, the terms premium and discount only apply to outstanding bonds trading on the secondary market.

There are two main reasons a bond will trade at a premium or discount to its par value:

1) General interest rates change, which cause new bonds to be issued with higher or lower coupon payments than what outstanding bonds pay. Investors have a choice when buying a bond: they can buy newly-issued bonds or outstanding bonds already trading on the secondary market. Thus, to compensate, the outstanding bonds trading on the secondary market must be sold at a higher or lower price in order to match what newly-issued bonds pay. Bond prices change not based on the coupon payment or par value (which are fixed), but because of what happens in relation to newly-issued bonds.

2) The credit rating of a bond changes, so that the risk changes. If the credit rating drops, there is an increased chance that the company might default and hence the bond will trade at a discount to reflect that risk. If the credit rating rises, the bond will then be deemed less risky and will sell for a premium. This is all explained by the discounted dividend model.

The coupon rate is determined by prevailing interest rates and the credit rating of the company at issue. The higher interest rates are, the higher the coupon rate has to be in order to entice investors to buy the bonds. The lower the credit rating, the higher the coupon payment has to be to compensate for the added risk.

To learn more about bonds, download my free book at http://www.invest-for-retirement.com and go straight to chapters 10,11, and 12 for a summary on bonds.

And who says bonds are boring?

Answer 3

Bonds are not usually sold at a discount or at a premium (though it does happen). They are usually sold at par (100% of face value) with the coupon rate set equal to the yield.

As time passes, interest rates change. If interest rates go up, then the yield is higher than the coupon rate and the price goes down (making it a discount). If rates go down, then the yield is less than the coupon rate and it is a premium.

The market determines what the yield should be based on treasury rates and the demand for a premium to cover the risk of the bond.

Treasury coupons are set by the Treasury using an auction process.

Answer 4

When a company issues a bond, they are taking out a fixed loan from the bond purchaser. The bond will have a designated interest rate and a length of life.

Factors that play into the interest rate that the company must pay to get people to purchase the bond include the prevailing market interest rates and the company's rating, which is meant to show how likely the company would be of defaulting on the bond. The worse the rating, the higher the interest rate that would be demanded by buyers purchasing the bond.

When selling bonds on the secondary bond market, the price of the bond is determined by the interest rate being paid, the current interest rate, the company's rating, and the time remaining until the bond matures. A bond's value diminishes when interest rates rise because its interest rate becomes less attractive when compared to interest rates being paid elsewhere.Likewise, the value of a bond increases when interest rates fall because the interest rate it pays becomes more attractive compared to the lower rates available elsewhere.

Answer 5

whenever the market rate YTM is greater than the coupon, the bond will sell at a discount (below par) when market rate YTM= coupon rate, then the price will = par value whn the market rate < coupon rate, the bond will sell at a premium (more than par)

Answer 6

for me, wang size does it, i have NEVER had any issues