Deep discount bond

A deep discount bond is a type of bond that is sold at a much lower price than the par value. It is quite typical to have a deep-discount bond which is sold at 20% less than its face value.

Since it is sold at a discount, its coupon rate is also considerably lower than the rates of fixed-income securities, even if their risk profiles happen to be similar.

Usually, though, deep-discount bonds are seen to carry greater risk than similar bonds. On the other hand, these are usually long-term bonds which attract investors because there is a minimal risk that these will be called before the time of maturity.

Deep discount bonds may sometimes be referred to as zero-coupon bonds. Zero-coupon bonds, however, do not have coupons at all. This simply means that periodic interest payments are not available under the provisions of this type of bond. The compounded interest is paid in full at the time of maturity. In addition to this, the difference between the bond price and the redemption value is included in the computation.

Zero-coupon bonds may either be long or short-term investments. Long-term bonds mature after ten to fifteen years, while short-term bonds mature in less than a year. Such short-term bonds are known as bills. U.S. Treasury bills and savings bonds are some examples of zero-coupon bonds.

Regular bonds, on the other hand, provide investors with regular income which comes in the form of coupon payments. Such payments are usually available on a semi-annual basis. The principal amount is then paid to the investor at the time of maturity.