Premium and Discounted Corporate Bonds

You can buy both premium and discounted corporate bonds. Like other types of bonds, corporate bonds are sold at either premium or at discounted prices. Once issued, the corporate bonds are sold in the secondary market. Corporate bond prices are usually determined by interest rates as well as the issuer's circumstances.

What is a Corporate bond premium?

Before we discuss what a corporate bond premium is, let's discuss what the par or face value of a corporate bond is. Bonds, including corporate bonds, are issued with a face value or par value of $1,000. This par or face value is the amount that the investor loans to the issuer for the bond and is the amount that is repaid back to the investor by the issuer when the corporate bond matures.

In the secondary market, corporate bonds can sell for any prices depending on the bond market and the interest rates. Corporate bonds can sell:

1. at par
2. below par (at a discount)
3. above par (at a premium)

Usually the corporate bond in the secondary market will not sell at par, the price of a corporate bond is either above par or below par depending on the corporate bond's issuer's financial stability and the overall interest rate trend.

Should I buy the corporate bond at a premium?

Usually the cheaper you can buy the corporate bond the more yield (profit) you have. However in some markets, it is not possible to buy A-rated corporate bonds below par (at a discount) so you may have to settle buying the corporate bond at premium because you want the monthly interests that the corporate bonds pay or some other benefits.

If I bought the corporate bond at discount, will I get the original amount I paid back when the bond matures?

If you buy the corporate bond at a discount, such as below $1,000, then when the corporate bond matures you will get the $1,000 face or par value, not the original discounted price you paid.

Similarly, if you buy the corporate bond at premium, you will only get the face value back when the bond matures, not the original expensive price you paid for the bond.