Bond prices The price of a bond is based on the market's assessment of any risk associated with the company that issues (sells) the bonds. The higher the risk associated with the company, the higher the interest rate. Bonds issued with a coupon interest rate (also called contract rate or stated rate) higher than the market interest rate are said to be offered at a premium . The premium is necessary to compensate the bond purchaser for the above average risk being assumed. Bonds are issued at a discount when the coupon interest rate is below the market interest rate. Bonds sold at a discount result in a company receiving less cash than the face value of the bonds. Bonds are denominated in $1,000s. A market price of 100 means the bond sold for 100% of face value. If its face value is $1,000, the sales price was $1,000. A bond sold at 102, a premium, would generate $1,020 cash for the issuing
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This note was uploaded on 12/25/2011 for the course FIN 3312 taught by Professor Staff during the Spring '08 term at Texas State.