Discount Bond
A bond that trades below its face (par) value, offering investors a built-in capital gain at maturity when the principal is repaid at par.
What is Discount Bond?
A discount bond is a bond that trades below its face (par) value—typically $1,000—meaning an investor pays less than the principal amount they will receive at maturity. Bonds trade at a discount when their coupon rate is below the current market yield for comparable bonds: because the coupon is insufficient to compensate for prevailing interest rates, investors pay less than par to boost their total return. Discount bonds include zero-coupon bonds (which pay no coupon and are issued at a deep discount) and coupon bonds that have fallen in price due to rising rates or deteriorating credit quality. The difference between the purchase price and face value (the discount) is effectively additional income that accretes over the bond's life.
Example
A 2% coupon bond originally issued at par ($1,000) is now trading at $850 because market interest rates have risen to 5%. The $150 discount means the investor who buys at $850 will receive $1,000 at maturity—a $150 gain in addition to the 2% coupon income. The yield to maturity of approximately 4.9% reflects both the coupon income and the accretion of this discount to par.