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I've always found it helpful to think about it this way:

Buying a bond at a discount means that you are buying a bond with a coupon rate that is lower than current interest rates. You are compensated by receiving the payments as well face value (more than you paid) at call or maturity.

Buying a bond at a premium simply means that you buying a bond with a coupon rate higher than current market rates. Since you are receiving a better rate of return than new issues, you pay more than it's worth. There are tax advantages to taking that capital loss as well.

So I absolutely agree that the concept of discount vs. premium is a red herring.

Hope this helps some...


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