Posted in Finance, Accounting and Economics Terms, Total Reads: 530
In financial terms, agio can be interpreted in two ways: Exchange Rate and Bond value. Foreign currencies fluctuate and thus the rate of exchange of the currencies also keeps on changing. This exchange rate is called agio.
In the case of bonds, the value of the bonds changes with the interest rates in the market. When the market interest rate falls with respect to the interest rate (called the coupon rate) of the bonds, the value of the bonds increases and the bonds are sold at a value greater than their face (par) value. Thus the bonds are sold at a premium value. This premium (difference between the sell value and the par value) is called agio.
The term agio is not used commonly these days and it is better known as exchange rate or the premium value accordingly.
Example: Suppose the par value of the bond is Rs 1000; with a coupon rate of 10%. Now the market rate goes down to 8%, so the bond would now offer higher payments to the investor. Thus the bond would now be sold at a higher value, called the premium, say Rs 1500. Thus agio in this case would be Rs(1500-1000) = Rs 500.