What is a 'Discount'
In finance, discount refers to a situation when a bond is trading for lower than its par or face value. The discount equals the difference between the price paid for a security and the security's par value.
BREAKING DOWN 'Discount'
For example, if a bond with a par value of $1,000 is currently selling for $990 dollars, it is selling at a discount of ($1000/$990)  1 = 1%, or $10. The reason a bond will trade at a discount is if it has a lower interest or coupon rate than the prevailing interest rate in the economy. In other words, since the issuer is not paying as high of an interest rate to the bondholder, the bond must be sold at a lower price to be competitive, or else no one would buy it. This interest rate, known as a coupon, is generally paid on a semiannual basis. The term coupon comes from the days of physical bond certificates (as opposed to electronic ones), when some bonds had coupons attached to them. Some examples of bonds that trade at a discount include U.S. savings bonds and Treasury bills.
Stocks and other securities can similarly be sold at a discount. However, this discount is not due to interest rates; rather, a discount is usually implemented in the stock market in order to generate buzz around a particular stock. In addition, the par value of a stock only specifies the minimum price the security can be sold for upon its initial entrance into the market.
Deep Discounts and Pure Discount Instruments
A type of discount bond is a pure discount instrument. This bond or security pays nothing until maturity. This type of bond is sold at a discount, but when it reaches maturity, it pays the par value. For example, if you purchase a pure discount instrument for $900 and the par value is $1,000, you'll get $1,000 when the bond reaches maturity. Investors don't receive interest income from holding these securities, however, their return on investment is measured by the price appreciation of the bond. The more discounted the bond at the time of purchase, the higher the investor's rate of return at time of maturity.
One type of pure discount bond is a zerocoupon bond, which doesn't pay interest but instead is sold at a deep discount. The discount amount is equal to the amount lost by a lack of interest payments. Zerocoupon bond prices tend to fluctuate more often than bonds with coupons.
A deep discount doesn't only apply to zerocoupon bonds; it is generally considered to apply to any bond that is trading for 20% below market value and beyond.
Discounts vs. Premiums
A discount is the opposite of a premium, which applies when a bond is sold for higher than par value. A premium occurs if the bond is sold at, for example, $1,100 instead of its par value of $1,000. Conversely to a discount, a premium occurs when the bond has a higher interest rate than the current market rate.

Bond Discount
Bond discount is the amount by which the market price of a bond ... 
Market Discount
The difference between a bond's stated redemption price and its ... 
Par Value
Par value is the face value of a bond, or for a share, the stock ... 
Effective Interest Method
The practice of accounting for the discount at which a bond is ... 
Bond
A bond is a fixed income investment in which an investor loans ... 
Face Value
Face value is the nominal value or dollar value of a security ...

Investing
Understanding Bond Prices and Yields
Understanding this relationship can help an investor in any market. 
Managing Wealth
How Bond Prices and Yields Work
Understanding bond prices and yields can help any investor in any market. 
Investing
Corporate Bond Basics: Learn to Invest
Understand the basics of corporate bonds to increase your chances of positive returns. 
Investing
Advanced Bond Concepts
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.

Will the price of a premium bond be higher or lower than its par value?
Find out why the selling price of a premium bond is always higher than its par value, including how changing interest rates ... Read Answer >> 
When is a bond's coupon rate and yield to maturity the same?
Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >> 
What determines bond prices on the open market?
Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>