What does it mean when a bond sells at a discount?

When a bond sells at a discount, it signifies that the bond’s stated interest rate is lower than the current market rates for similar investment opportunities. When market interest rates rise, existing bonds with lower rates become less attractive to investors, thus causing those bonds to sell for less than their face value, or par value. Investors will pay a lower price for a bond that provides less return compared to new bonds that offer higher yields.

This situation alerts potential buyers that they can realize better returns elsewhere in the market, leading them to pay less for the bond rather than its original value. This correlation between market conditions and bond pricing is fundamental to understanding how bonds are valued in the financial markets.