Bond Pricing and Yields: Par, Premium, and Discount
A bond's coupon never changes. The market's opinion of what that coupon is worth changes constantly — and since the payment is fixed, the only thing left that can move is the price.
Why the price has to move
A bond promises fixed payments. A $1,000 bond with a 4% coupon pays $40 a year, and that $40 is written into the contract — it doesn't rise when rates rise, and nobody renegotiates it.
So suppose newly issued bonds start paying 6%. Your 4% bond is now competing against them with an unchangeable payment. Nobody will buy yours at $1,000 when $1,000 elsewhere buys $60 a year. The only variable left is the price, and it falls until $40 a year represents a competitive return on the smaller amount paid.
That's the whole mechanism, and it's worth holding onto because it explains something that surprises people: a bond fund can lose money in a year when nothing defaulted and every coupon arrived on time. Nothing went wrong. Rates rose, and the price of a fixed payment fell.
Rates up, prices down. Rates down, prices up. A fixed payment can only be repriced by moving what you pay for it.
Three numbers people call 'the yield'
The coupon rate is fixed at issue and set against face value. A 5% coupon on a $1,000 bond is $50 a year, forever, regardless of what the bond later trades for.
Current yield is that same $50 divided by what you actually paid. Buy the bond at $833 and the $50 is a 6% current yield. It answers a narrow question — what am I earning on my money right now — and ignores everything about maturity.
Yield to maturity is the complete figure: the rate that makes every remaining coupon plus the return of face value at maturity equal today's price. It's the one worth quoting, because it captures the pull toward par. Buy a discount bond and you collect coupons and a capital gain at maturity; buy a premium bond and the price grinds down to $1,000, so current yield flatters you and YTM tells the truth.
Par, premium, discount — all one comparison
The three names describe a single relationship: the bond's coupon rate against the yield the market currently demands for that maturity and credit.
Equal, and the bond trades at par — $1,000, or quoted as 100. Coupon above the market yield and it's worth more than face value, so it trades at a premium, quoted above 100. Coupon below the market yield and it trades at a discount, below 100.
Quotes are given as a percentage of face value rather than in dollars, which trips people up on first contact. A bond quoted at 95 costs $950 per $1,000 of face value; one quoted at 105 costs $1,050. Neither is cheap or expensive in itself — the premium bond simply carries a higher coupon that you're paying for up front.
Bond prices move opposite to interest rates, because a fixed coupon can only be repriced by moving the price. A bond trades at a discount when market yields exceed its coupon and at a premium when they don't.
Sources
- Bonds — FINRA (2026)
- Understanding Bond Yield and Return — FINRA (2026)