Discount bond

Definition

A discount bond is a bond sold for less than its face (par) value. The difference between the purchase price and the par value represents interest income for the bondholder.

5 Must Know Facts For Your Next Test

1. Discount bonds are typically sold at a price below their face value.
2. The yield to maturity (YTM) of a discount bond is higher than its coupon rate.
3. Investors who buy discount bonds expect to gain from both periodic coupon payments and capital appreciation.
4. Discount bonds can result from rising interest rates, which make existing bonds with lower rates less attractive.
5. Zero-coupon bonds are a common example of discount bonds, as they pay no periodic interest but are issued at a deep discount.

Review Questions

• What happens to the price of a bond if it is considered a discount bond?
• How does the yield to maturity of a discount bond compare to its coupon rate?
• Why might an investor choose to purchase a discount bond?

Related terms

Coupon Rate:

The annual interest payment made by the issuer relative to the bond's face value.

Yield to Maturity (YTM):

The total return anticipated on a bond if it is held until it matures.

Zero-Coupon Bond:

A type of bond that does not pay periodic interest and is sold at a deep discount to its face value.