Discount Bond

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DEFINITION of 'Discount Bond'

A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the secondary market.

The "discount" in a discount bond doesn't necessarily mean that investors get a better yield than the market is offering, just a price below par. Depending on the length of time until maturity, zero-coupon bonds can be issued at very large discounts to par, sometimes 50% or more.

INVESTOPEDIA EXPLAINS 'Discount Bond'

Because a bond will always pay its full face value at maturity (assuming no credit events occur), discount bonds issued below par - such as zero-coupon bonds - will steadily rise in price as the maturity date approaches. These bonds will only make one payment to the holder (par value at maturity) as opposed to periodic interest payments.

A distressed bond (one that has a high likelihood of default) can also trade for huge discounts to par, effectively raising its yield to very attractive levels. The consensus, however, is that these bonds will not receive full or timely interest payments at all; because of this, investors who buy into these issues become very speculative, possibly even making a play for the company's assets or equity.

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