Discount Bond

A discount bond is one that is sold with an original issue discount (OID) i.e. the purchase price is lower than the face value. A discount bond can also be a bond that is trading below its face value, or below par. A zero-coupon bond is a discount bond, since the investor buys the bond at a significant discount to par in order to compensate for the lack of coupon payments. The effective yield to the investor is derived from the bond’s accreted values (as laid out in the documentation) and redemption at par. Bonds can trade at discounts because of higher interest rates. The only way an existing bond that was originally priced off lower interest rates can adjust and offer an equitable return is for the price to decline (price and yield move inversely). Bonds also trade at discounts due to issuer distress and heightened default risk.