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A bond premium occurs when a bond is sold for more than its face value, typically because it offers a higher interest rate compared to current market rates. In contrast, a bond discount is when a bond is sold for less than its face value, often because it has a lower interest rate than prevailing market rates. The premium or discount reflects the bond’s yield relative to market conditions and affects the total return for investors.
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What is premium discount municipal bond funds?
Premium discount municipal bond funds are investment vehicles that focus on municipal bonds trading at prices above (premium) or below (discount) their face value. A premium bond typically offers lower yields due to its higher price, while a discount bond offers higher yields as it is purchased for less than face value. These funds provide investors with exposure to municipal debt, which is often tax-exempt, and can help diversify a portfolio. The choice between premium and discount bonds depends on an investor's yield preferences and tax considerations.
Distinguish between deep discount bond and zero coupon bond?
the main difference between deep discount bond and zero coupon bond is that in case of zero coupon bond no int is payable periodically while in case of deep discount bond int is payable periodically at very lower rate say 2% per annum
Is the total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond?
Yes, the total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount (if the bond is issued at a discount) or minus the total premium (if the bond is issued at a premium). This accounts for the effective cost of borrowing, reflecting both the cash flows from interest payments and the adjustments for the bond's initial issuance price relative to its face value.
Why the discount bond is not a bargain?
Because the rate of return it is still a function of market influences. Whether a bond is premium or discount is merely a reference of the coupon rate vs the real market interest rate. If the issuer sets their coupon rate below the market rate, it is said to be discounted. Set the coupon rate above the market interest rate and it is said to be premium. An invester pays below face value for a discount bond and above for a premium. In the end, the invester receives a return on their investment that aligns with the real market interest rates. Premium vs Discount is merely a reference point from where you start - you still end up in the same place.
What does it mean for a bond to be issued at a discount or premium?
The Conversion Premium is the amount by which the current price of a convertible security exceeds the current market value of the stock into which it may be converted. For example, a bond with a price of $110, convertible into 20 units of stock, trading at $5.10 (totalling $102) would have a conversion premium of $8.
Is the straight-line amortization or effective interest rate method better?
This method is preferred over the straight-line method of amortizing bond discount or bond premium. Amortization of a bond discount or premium is the difference between the interest expense and the nominal interest payment. The amortization entry is: Interest Expense (effective interest rate x carrying value) Cash (nominal interest rate x face value) Bond Discount (for the difference)
What is premium discount municipal bond funds?
Premium discount municipal bond funds are investment vehicles that focus on municipal bonds trading at prices above (premium) or below (discount) their face value. A premium bond typically offers lower yields due to its higher price, while a discount bond offers higher yields as it is purchased for less than face value. These funds provide investors with exposure to municipal debt, which is often tax-exempt, and can help diversify a portfolio. The choice between premium and discount bonds depends on an investor's yield preferences and tax considerations.
What is the difference between a discount yield and a bond equivalent yield?
Chamika & n
When effective interest method is used to amortize bond premium or discount the periodic amortization will be?
increasse if the bonds were issued at either a discount or premium.
Distinguish between deep discount bond and zero coupon bond?
the main difference between deep discount bond and zero coupon bond is that in case of zero coupon bond no int is payable periodically while in case of deep discount bond int is payable periodically at very lower rate say 2% per annum
What is the difference between the bond's principal and the bond's par value?
The bond's principal refers to the initial amount borrowed by the issuer and repaid at maturity, while the bond's par value is the face value of the bond that is used to calculate interest payments. In most cases, the principal and par value are the same, but they can differ if the bond is issued at a discount or a premium.
Is the total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond?
Yes, the total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount (if the bond is issued at a discount) or minus the total premium (if the bond is issued at a premium). This accounts for the effective cost of borrowing, reflecting both the cash flows from interest payments and the adjustments for the bond's initial issuance price relative to its face value.
The issuance price of a bond does not depend on the 1. face value of the bond 2. riskiness of the bond 3 method used to amortize the bond discount or premium 4 effective interest rate?
The issuance price will not depend on: 3. Method used to amortize the bond discount or premium When issuers estimate an offer price, they need to estimate the risk premium over the riskless securities, in percentage points, assess the effective interest rate for the given maturity, and assume a face value, usually 1,000. These values have to be plugged in the formula based on Time Value of money. They don't need to worry about how a purchaser will amortize the premium or accrue the discount, which is done for tax purposes.
What is a discount on bonds payable account in accounting?
All bonds have a stated or "par" value, which is the value that the bond will hold after the bond term is completed at maturity (par value is usually $1000 per bond). When a bond is issued at a discount, it means that a company issued the bond for less than the par value (i.e less than $1000). The original discount is calculated as the difference between the par value and the bond sale price, and it is amortized over the life of the bond.
What is the Meaning of unamortized discount of bonds payable?
Unamortized discount on bonds payable refers to the difference between the face value of a bond and its issue price when the bond is sold for less than its par value. This discount is not immediately expensed but is amortized over the life of the bond, gradually increasing the bond's carrying value on the balance sheet. As the discount is amortized, it affects interest expense, resulting in higher interest costs in the early periods compared to later ones.
What is the difference between Premium Bond holdings and value?
If you are referring to the high value premium bond winners table on the NS&I website, the Holding is the total amount of premium bonds held and the Bond Value is the block of premium bonds the winning number fell in, eg Holding £30,000, Block Value £1000 means that the winner holds 30,000 premium bonds and the winning number fell within a block of 1000 consecutively numbered bonds.
Why the discount bond is not a bargain?
Because the rate of return it is still a function of market influences. Whether a bond is premium or discount is merely a reference of the coupon rate vs the real market interest rate. If the issuer sets their coupon rate below the market rate, it is said to be discounted. Set the coupon rate above the market interest rate and it is said to be premium. An invester pays below face value for a discount bond and above for a premium. In the end, the invester receives a return on their investment that aligns with the real market interest rates. Premium vs Discount is merely a reference point from where you start - you still end up in the same place.
