Discount Bond
A discount bond is a bond that is issued for less than its par—or face—value. Discount bonds may also be a bond currently trading for less than its face value in the secondary market. A bond is considered a deep-discount bond if it is sold at a significantly lower price than par value, usually at 20% or more.A discount bond may be contrasted with a bond sold at a premium.
Discount Bonds
Definition
Discount bonds are bonds issued at a price lower than their face or par value. This means that investors purchase the bonds at a price below their face value and redeem them at face value upon maturity, earning the difference. Discount bonds can also be bonds traded in the secondary market at a price below their face value. If a bond is sold at a price significantly below its face value, typically 20% or more, it is considered a deep discount bond. Discount bonds are the opposite of premium bonds.
Origin
The concept of discount bonds dates back to ancient times when governments and businesses issued bonds to raise funds. As financial markets developed, discount bonds became a common financing tool, especially in high-interest-rate environments where issuing discount bonds could attract more investors.
Categories and Characteristics
Discount bonds are mainly divided into two categories: government discount bonds and corporate discount bonds. Government discount bonds are usually issued by national or local governments, have lower risk, and offer relatively stable returns. Corporate discount bonds are issued by companies, have higher risk, but also offer higher potential returns. The main characteristics of discount bonds include:
- Issued below face value: Investors purchase the bonds at a price below their face value.
- Maturity yield: Investors redeem the bonds at face value upon maturity, earning the difference.
- Market volatility: The price of discount bonds is significantly affected by market interest rates and credit risk.
Specific Cases
Case 1: A company issues a batch of discount bonds with a face value of 1000 yuan and an issue price of 900 yuan. After purchasing, investors redeem the bonds at 1000 yuan upon maturity, earning a difference of 100 yuan.
Case 2: A government issues a batch of discount bonds with a face value of 5000 yuan and an issue price of 4500 yuan. After purchasing, investors redeem the bonds at 5000 yuan upon maturity, earning a difference of 500 yuan.
Common Questions
1. Why buy discount bonds?
Discount bonds offer a low-risk investment opportunity where investors can earn the difference by purchasing bonds below face value and redeeming them at face value upon maturity.
2. What are the risks of discount bonds?
The main risks of discount bonds include market interest rate fluctuations and the issuer's credit risk. If market interest rates rise, bond prices may fall; if the issuer's credit situation deteriorates, it may affect the bond's repayment ability.
