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What is Agio?
Agio refers to a premium or percentage paid on a bond. This term is also used in the context of currency exchange, it refers to the percentage charged when one currency is exchanged for another one with a higher value. Agio also describes the difference between the nominal value and actual value of a currency or the difference between the market value and face (par) value of a bond. Agio is often used in the international markets where bonds are traded and currencies are exchanged. Traders in the international markets also describe agio as the fee paid for a transaction.
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How Does Agio Work?
When the market value of a bond is greater than its face value, agio can be realized. It is the premium paid for trading bonds or the percentage paid for exchanging on currency for another in the international market. In certain cases, agio can mean the spread of a bond, although it is not frequently used. In the international market, different currencies have different values, when a currency with a smaller value is exchanged for a currency with a higher value, a percentage is paid for this transaction which is called agio.
Agio and Bond Values
The value of bonds is crucial to the understanding of how agio works. A bond value refers to the worth of bond given certain factors such as the intrinsic value of the bond, and market valuation. Bond valuation is a complex phenomenon given that different bonds exist and have different values. Examples of bonds include corporate bonds, municipal bonds, and others. When a bond is traded in the market, a premium is paid called agio. This is also the difference between the market value or market price and the face value of the bond.