What can cause bonds to trade at a discount?

Bonds trade at a discount primarily due to rising interest rates. When interest rates increase, newly issued bonds typically offer higher yields to attract investors. As a result, existing bonds that have been issued at lower interest rates become less attractive in comparison. To make these older bonds more appealing in the market, their prices must decrease, leading them to trade at a discount.

This relationship between interest rates and bond prices is a cornerstone of bond market dynamics. Investors will favor newly issued bonds with higher returns, which pressures the older bonds to reduce their prices so that their yields align more closely with the current market conditions. Therefore, the direct connection between rising interest rates and the corresponding drop in existing bond prices is what drives them to trade at a discount.