unofficial microsoft.public.money FAQ and A
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How to do things in Money: Investments

Q) I bought a $1,000 bond for $850--Money tells me it cost $85. What gives?

A) Bonds are not priced by the amount of the bond. They are priced as a percentage of total face (par) value, as they are in quotes from brokers. The price of a bond bought at a 10% discount from face value would be 90.0. Prices over 100 would be bonds bought at a premium. A bond, of any value, bought for a price of 88.5 was "bought at a discount" and cost 88.5% of its face value. A bond bought at a price of 105 was "bought at a premium" and cost 105% of its face value.

There is a reference in the MSKB that describes this correctly except that the sentence that starts "If the current value of the bond exceeds the par value ..." is wrong. The example that follows that sentence is correct.

The Bond Market Association has a really good site explaining bond investing. Clicking glossary in the left hand column, then looking up "price" gives a good description of how this works as well.

Thanks for this answer go to Cal Learner -- MVP.

See also "How come my bond fund investment is off by a factor of 100?" for the corollary question about the pricing of bond mutual fund investments.

References:
Bond Market Association's page on bond investing
MSKB: 121903 How bond investments are priced in Money

Please see this disclaimer if you are using Money 2005 or this comment if you are using Money 2006.

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