Bond discount

A bond discount is the amount by which the purchase price of a bond is less than its face value. This situation arises when a bond's stated interest rate is lower than the current market interest rate. Investors will bid the price of this bond down until its effective interest rate is the same as the current market interest rate, adjusted for the risk associated with the bond. For example, if a bond with a face value of $1,000 is bought by an investor for $920, the bond discount is $80. Over time, the investor amortizes this discount until the book value of the bond equals its face value by the maturity date of the bond.