Bond Calculator · Practical guide
Premium vs Discount Bonds
A bond priced above face value is a premium bond; below face is a discount bond. Here is why, and what each pays you.
At a glance
The Definitions
A bond trades at a premium when its price exceeds face value, and at a discount when its price falls below. At exactly face value, it trades at par. The coupon never changes — the market rate moving above or below the coupon rate is what pushes the price to one side of par or the other.
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Bond Calculator
Enter your own values, then compare the result with the examples below.
Results
The Same Bond at Both Prices
| Premium Bond | Discount Bond | |
|---|---|---|
| Market rate | 4% | 6% |
| Price | $1,081.11 | $926.40 |
| Current yield | 4.62% | 5.40% |
| Approx. YTM | 4.03% | 5.96% |
| Total coupons (10 yrs) | $500.00 | $500.00 |
Both rows are the same $1,000, 5% coupon, 10-year bond — only the market rate changed.
Why Anyone Buys a Premium Bond
Overpaying feels wrong, but the premium bond above still yields about 4% — matching everything else in a 4% market. You pay $1,081.11, collect $50 a year for ten years, and get $1,000 back at maturity. The $81.11 you lose at maturity is exactly offset by coupons that were richer than today's market offers.
Why Discount Bonds Are Not "Cheap"
The discount bond's 5.40% current yield plus the $73.60 gain at maturity simply delivers the 6% the market demands. Neither bond is a bargain — price adjusts so comparable bonds offer comparable returns. The real choice is about cash-flow shape: premium bonds pay more income now, discount bonds defer part of the return into the gain at maturity.
Tax and Portfolio Notes
In taxable accounts the difference can matter: discount bonds convert some return into capital gain at maturity, while premium bonds overpay taxable coupon income. Check the calculator above to compare current yield and approximate YTM on any pair of bonds before deciding which structure fits your situation.
Frequently Asked Questions
Is a premium bond a bad investment?
No. The premium just prices in above-market coupons. Its yield to maturity matches comparable bonds — you simply receive more income along the way and less principal back at the end.
What does it mean when a bond trades at par?
The market rate equals the coupon rate, so the bond is worth exactly its face value. Its current yield, coupon rate, and yield to maturity are all the same number.
Do premium or discount bonds have more interest-rate risk?
At the same maturity and rate, they behave almost identically. Discount bonds have slightly higher duration, so they move a touch more when rates change, but the difference is small for similar bonds.
Which is better for income investors?
Premium bonds deliver higher periodic cash flow, which some income investors prefer. Discount bonds deliver part of the return as a lump sum at maturity. Compare the YTMs — that is the apples-to-apples number.