Question

Describe a bond issued at par.

Explain why an investor would purchase a bond issued at par instead of a bond issued at a discount or a bond issued at a premium

(In Detail)

Answer 1

Describe a bond issued at par;

When a bond is issued at face value in the market then it is known as bond issued at par. In other words we can say that when a firm sale its’ bond in the market at the value which is neither low nor high than its face value then such issue of bond is known as bond issued at par.

Explain why an investor would purchase a bond issued at par instead of a bond issued at a discount or a bond issued at a premium?

As we know that when a bond is issued in the market at par then it means that bond is generating same return as prevailing in the market, in other words we can say that interest paid on bond is same as the normal return in the market that is why bond is selling at par value.

When a bond is issued in the market at discount then it means that bond is generating lower return in compare to prevailing rate in the market, in other words we can say that interest paid on bond is less than the normal return in the market that is why bond is selling at discount. We know that when a bond is selling at discount then it means that bond is selling at lower value than its’ face value.

When a bond is issued in the market at premium then it means that bond is generating higher return in compare to prevailing rate in the market, in other words we can say that interest paid on bond is higher than the normal return in the market that is why bond is selling at premium. We know that when a bond is selling at premium then it means that bond is selling at higher value than its’ face value.

So on the basis of above explanation, it is clear that an investor will purchase a bond issued at par instead of a bond issued at a discount or a bond issued at a premium because investor will receive same return on the investment as prevailing in the market. We know that if investor want to receive higher return then he has to pay more money to buy such bond, which is know as bonds at premium, that is why investor will not be interested to pay more money immediately to buy such bond issued at premium due to time value of money. Investor does not willing to buy a bond issued at discount because such bond will generate lower return as compare to market return that is why investor will not be interested to buy such bond.

Hence it is clear that an investor will purchase a bond issued at par instead of a bond issued at a discount or a bond issued at a premium.