Discount bond

Definition

Discount bond in plain English

A bond's face value is the fixed amount it pays back at the end (often $1,000). A discount bond is one you can buy today for LESS than that face value — say $920 for a bond that repays $1,000. This usually happens because the bond's fixed interest payments look stingy compared to newer bonds, so buyers will only take it at a markdown, or because it pays no interest at all and your entire profit comes from the gap. It's like buying a $100 gift card for $92: you pay less now and collect the full amount later, and that built-in gap is your reward.

Related Principles of Finance terms

• Accrued interest
• Allocation effect
• Basis
• Basis point
• Benchmark
• Bond-equivalent yield (BEY)
• Bootstrapping
• Callable bond
• Clean price
• Comparable company analysis (comps)