What is a Market Discount?
Market discount is the loss in market value sustained by a bond following an increase in interest rates.
How Does a Market Discount Work?
In the secondary bond market, bond prices move inversely to interest rates. That is, an increase in interest rates will cause the value of outstanding bonds to decline. The reason for this is that new bonds now have higher coupon payments, and existing bonds have to adjust their prices in order to trade at the same yield.
[This relationship is definitely tricky. Learn more by reading The 3 Most Deadly Misconceptions About Bonds.]
Why Does a Market Discount Matter?
A market discount affects bondholders only if they intend to sell the bond in the secondary market prior to the bond's maturity date.
