Will the demand for a higher yielding security cause the high yield bond to be issued at a premium, or will the risk of default and other risks cause the bonds to be issued at a discount to face value?
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1I think it depends on the face value interest rate. IOW, a junk bond with a low FV interest rate would be sold at a discount, but a junk bond with a high FV interest rate would be sold at a premium. (This is a comment since I'm not sure.)– RonJohnAug 5, 2018 at 21:54
1 Answer
New bonds are typically issued with a coupon that matches the market yield. That way the issue price is around 100. Although, since coupons cannot be odd, multi-decimaled values, they are also usually rounded down to the nearest 1/8th of a percent (sometimes other fractions), meaning that the bond will be issued at a discount since the market yield will be higher than the coupon. The issue price will very often fall somewhere between 99.50 and 100.
The demand for new issues is gauged by issuing bank syndicates and capital markets teams so that the investors expectations of market yield and coupon lead to a smooth and well subscribed sale.