Question

• Part 1: Describe a bond issued at face value. 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. (1-2 paragraphs)

Answer 1

Solution:

Bond issued at face value means bond were issued at their stated rate, there is no discount and premium on issue of bond. When market rate of interest and coupon rate of interest offered by bond are same then generally bonds are issued at face value. Face value is important for a bond because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit rating.

Investor would purchase a bond issued at par instead of bond issued at a discount or premium because in this case, investor is well aware about the regular return of bonds that he will earn and will recover his invested amount at maturity. If bond issued at premium then return on investment on bond will decrease for investor and he will receive only face value at maturity. If bond are issued at discount, then there is risk for the investor, if he will sell the bond earlier then he will be able to recovery his invested amount or not.

Therefore investor prefer to purchase a bond issued at par instead of bond issued at discount of premium.