What it means
The word comes from old money-changing, where swapping coins of different metals or mints never happened at exactly equal value. The agio was the premium or allowance that made the exchange balance, paid to whoever bore the difference in quality or convenience.
Money-changers in the trading cities of Europe earned their living from these premiums, and their ledgers recorded agio as a line of income. In currency dealing the concept survives as the spread and premium around an exchange rate.
The rate you receive for travel money or a commercial conversion differs from the midpoint, and that difference is the modern descendant of the money-changer's agio. In bond markets the meaning shifts to price versus par.
A bond trading above its face value trades at a premium, and agio names that excess, which arises when the bond's coupon beats the interest rates available on new issues. When a currency or bond trades below its reference value, the discount is called disagio, and the pair lets older texts describe both sides of an exchange.
European usage keeps the word current. In several European languages and markets, agio still denotes the premium over par on shares or bonds, and it appears in share-issue contexts where stock is sold above nominal value.
When a company issues shares above their nominal par, the excess lands in a share premium account, which continental accounting traditions label with the same agio vocabulary. For a manager, the useful lesson is that exchange has a price.
Whether converting currencies for a supplier payment or buying a seasoned bond above par, the premium paid over the reference value is a real cost that belongs in the deal's economics. The term also sharpens thinking about par, since any price quoted above or below a reference value has a cause, usually interest rates, quality or convenience, and naming it forces the question of what that cause is worth.
In practice the word is now more common in European accounting and older bond texts than on a dealing screen. Dealers express the same idea as premium or spread in plainer language, so the reader should translate agio into those terms.
In practice
Real-world examples.
Example
A bond with a 5% coupon trades at 104 when new issues yield 4%, so the four-point agio over par is the market's price for the above-market income stream. Buyers pay that premium knowing it will be amortised against interest income as the bond approaches maturity. The bond's yield to maturity ends up below its coupon, which is the expected result for a premium bond.
Example
A traveller exchanging currency at an airport kiosk receives a rate 2% worse than the market midpoint. The gap is the agio the kiosk charges for the convenience of immediate cash. Comparing the quoted rate with the midpoint reveals the true cost of the conversion before any money changes hands.
Example
A European company issues shares with a nominal value of one euro at twelve euros, so each share carries an eleven-euro agio. The company records that excess in its share premium reserve rather than in its capital account. An analyst reading the balance sheet can trace the premium in the reserves section.
Formula
Calculation
Agio on a bond = market price minus par value, often expressed as a percentage of par. A bond with $1,000 par trading at $1,040 carries an agio of $40, or 4%, which is amortised against interest income over the bond's remaining life for tax and accounting purposes.Case study
Seen in the real world.
A made-up importer converts a large euro payment at its bank's corporate desk and notices the rate is a full point off the screen midpoint. This case study is fictional and illustrative. It requests quotes from two competing desks, narrows the agio to a third of a point, and saves enough on a year's conversions to fund a part-time treasury hire. The importer then sets a written rule that every conversion above a set size must be quoted by at least two desks and compared against the screen midpoint. The discipline costs little in staff time but makes the agio visible in the monthly treasury pack, where it was previously buried in the quoted rate.
Watch out
Common mistakes.
- Confusing agio with the exchange rate itself; the rate is the reference price, while agio is the premium or charge applied around it, and the two move for different reasons.
- Ignoring the premium when buying bonds above par; the agio paid over face value is gradually lost at redemption, so the true yield is the coupon adjusted for that amortising premium.
- Assuming retail exchange rates are the market rate; kiosks and cards embed an agio in the quoted rate, and comparing against the midpoint reveals the true cost of the conversion.
Questions
People also ask.
What is agio?
The premium or percentage difference in an exchange of values. Historically it was the money-changer's charge for converting currencies; in bond and share markets it denotes the amount by which a price exceeds par or nominal value.
What is the difference between agio and disagio?
Agio is a premium above the reference value, disagio a discount below it. A bond priced over par carries agio; one priced under par carries disagio, and the same pairing applies to currency exchanges.
Where is the term agio used today?
Mainly in European accounting and bond markets, where it denotes premiums over par or nominal value, and in historical texts on money-changing. Modern dealing screens express the same idea as premium or spread.
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