There are a number of reasons why a security may be sold below par. A bond may be sold below par after the creditworthiness rating of the company or government which issues it is downgraded. An investor may also choose to sell a bond below par in order to recover the bulk of their capital to use for other investments.
Example: You buy a bond at its face value of 20,000 Swiss francs. The bond pays out a coupon at the rate of 1% interest per year, and has a 10-year term. 3 years into the term, a new investment opportunity arises which allows you to make a 3% annual return with very little risk. Unfortunately, your capital is tied up in the bond for another 7 years, and there are plenty of 1% interest bonds on the market. To entice an investor to buy your bond so that you can recover your capital, you decide to offer it for 19,700 Swiss francs – 300 francs below par. The 300-franc discount encourages an investor to buy the bond from you because doing so is more profitable than buying a bond at par. Although you made a 300-franc loss on the bond’s face value, the 19,700 francs which you recover can now be invested at a 3% return rate rather than 1%. You earn a return of 591 francs per year, or 4137 francs over the next 7 years – 2737 francs more than the 1400 francs which you would have earned in coupons had you kept the bond.
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