ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The discount takes into account the risk of the bond and the creditworthiness of the bond issuer. A discount bond is offered at a lower price than the prevailing market rate. Buying the bond at a discount means that investors pay a price lower than the face value of the bond.

Detailed explanation-2: -1. How does an investor earn money by buying bonds at a discount? The investor buys bonds below par value and earns full par at redemption in addition to the interest.

Detailed explanation-3: -There are two ways to make money by investing in bonds. The first is to hold those bonds until their maturity date and collect interest payments on them. Bond interest is usually paid twice a year. The second way to profit from bonds is to sell them at a price that’s higher than you initially paid.

Detailed explanation-4: -A bond will trade at a discount when it offers a coupon rate that is lower than prevailing interest rates. Since investors want a higher yield, they will pay less for a bond with a coupon rate lower than the prevailing rates-the upfront discount makes up for the lower coupon rate.

Detailed explanation-5: -A bond that offers bondholders a lower interest or coupon rate than the current market interest rate would likely be sold at a lower price than its face value. This lower price is due to the opportunity investors have to buy a similar bond or other securities that give a better return.