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What is a Bond Discount?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 August 2016
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    Conjecture Corporation
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One of the realities of buying and selling bonds is the bond discount. Essentially, the bond discount is a fixed or percentage amount that is deducted from the actual purchase price of the bond, based on the current market value. Bond discounts represent a significant opportunity to build up a personal portfolio, depending on the projected performance of the bond.

There can be several reasons why the approach of a bond discount may be a wise move for the current bondholder. One scenario has to do with concerns about changes in the bond’s par. If there is a strong sense that the bond is going to depreciate in value for some reason, the bond holder may choose to sell the bond at a discounted rate that will recoup the original investment in the bond, and perhaps provide a small profit. The discount bond price thus ensures that the investor does not lose money on the investment, even though the original anticipated gain from the transaction does not come to pass.

A bond discount may also be implemented as a means of raising operating capital or financial resources to meet an unanticipated expense. In situations of this nature, the bondholder may choose to sell off bonds as a discounted rate, increasing the chances for raising the needed funds in a short period of time.

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Corporate raiders may also choose to issue notification of a bond discount when liquidating the assets of a company acquired in a hostile takeover. Once again, the main goal of the discount is to unload the assets in a relatively short period of time, and create profit that is realized from the selling activity. As long as the final price for the bond discount is sufficient to make a profit for the black knight, the move is considered to be a sound financial strategy.

The bond discount provides buyers with the chance to pick up on some excellent deals. Generally, bonds that are purchased at a discount will eventually yield a reasonable amount of appreciation in value, making them an ideal conservative investment for persons with the resources to purchase and hold on to them over the long term.

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