Question

Do you end up paying the same amount of money for a bond issued at a discount or a bond issued at a premium ?

Answer 1

FROM INVESTOR'S POINT OF VIEW

NO.

When bond is issued at discount, money paid is issue value which is less than face value of the bond.

When bond is issued at a premium, money paid is issue value which is more than face value of the bond.

Example 1 -

Face value of Bond is $ 10.

Issue value of Bond is $ 8

Here, bond is issued at discount (here discount amount being $ 2). Buyer will pay $8 to buy the bond i.e. less money would be paid.

Example 2 -

Face value of Bond is $ 10.

Issue value of Bond is $ 15

Here, bond is issued at a premium (here premium amount being $ 5). Buyer will pay $15 to buy the bond i.e. more money than face value would be paid.

FROM COMPANY'S POINT OF VIEW

At the time of redemption, Yes

You will now wonder why someone would ever purchase bond at a premium ? - Reason is buyer gets other benefits attached with bonds issued at premium e.g. interest rates are generally high for bonds issued at premium which makes those bonds attractive to investors. In other words, loss of payment of extra premium at initial stage is compensated by higher rate of interest till maturity. In all, buyer is benefitted if all calculations are made on Present Value.