What is a Discount Bond?

Last Updated: 23 Oct 2025

Discount bonds may look simple, like something is offered at a lower price, but they carry a unique mechanism that sets them apart from other fixed-income investments. These bonds allow better investment diversification among investors seeking growth. To know its true potential, here we’ll discuss what discount bonds are, why they are issued, how they work and the benefits and limitations they have.

How Discount Bonds Work?

The discount bond meaning becomes clear when you get clarity on how these debt instruments work. They are specifically sold at a lower cost than their face value and at maturity, investors can get the full principal and interest.

Discount bonds are issued at a lower price than their face value. One of the discount bond examples can be like the following scenario: Suppose an investor purchases a bond for ₹900 with a face value of ₹1,000, the issuer will repay the full ₹1,000 on maturity. Thus, the ₹100 difference becomes the investor’s return. However, some discount bonds do not carry periodic coupon payments, so the discount itself acts as the income.

Reasons for Bonds Being Issued at a Discount

Bonds can be issued at a discount rate to attract more investors. Besides this, here are a few more reasons that influence bond issuance at discount rates:

• High Market Interest Rates: Older or lower coupon bonds are often discounted to remain attractive once bonds with higher returns are launched in the market.
• Issuer’s Credit Risk: Bonds with lower credit ratings may carry more risk, so a discount is given as compensation.
• Low or Zero Coupon Payments: If a bond pays little or no interest, the discount itself becomes the main source of return for investors.
• Unfavourable Market Conditions: During low demand or uncertainty, bond prices are reduced to gain attention from potential investors.

Key Features of Discount Bonds

Instead of paying investors steady interest over time, discount bonds deliver profit through the difference between the purchase price and their value upon maturity. On top of that, here are a few more features you can look for:

• Fixed Redemption Value: At maturity, investors receive the full face value of the bond.
• Less Requirement for Interest Payments: Debt instruments like zero-coupon bonds do not pay interest during their tenure. Instead, the discount itself acts as the investor’s return.
• Predictable Returns: The profit from the discount can be estimated at the time of purchase if the amount has been held till maturity.
• Portfolio Diversification: Discount bonds can be combined with other investments to diversify your portfolio and safeguard it from market instability.

Types of Discount Bonds

There are various types of discount bonds depending on the issuer, maturity period and payment of interest. Here’s a quick look at some of the common types of bonds:

• Zero-Coupon Bonds: These bonds do not pay periodic interest and are sold below their face value.
• Treasury Discount Bonds: These investment options are government-issued Treasury Bonds at a low price.
• Corporate Discount Bonds: These are issued by companies, and they are sometimes offered at a discount because of low credit ratings or market conditions. They have higher returns that may be higher and are also associated with a little more risk than government bonds.
• Short-Term Discount Bonds: Bonds that have a maturity of less than one year and are sold at a discount. They assist investors to place short-term funds and make a profit in the process.
• Long-Term Discount Bonds: Bonds that are issued with a maturity of a few years at a discounted price and they are suitable for investors who are seeking steady capital growth.

Advantages and Risks of Discount Bonds

Discount bonds offer unique opportunities for investors, but they also carry certain risks. So, being aware of both benefits and limitations can help you choose the debt instruments that fulfil your financial goals. Some of its main advantages include:

• Capital Appreciation: The investors can purchase at a discounted price and get the full face value upon maturity. This enables them to make a profit in case of no regular interest payments.
• Predictable Returns: When the bond is held to maturity, the difference between the purchase price and the amount of redemption is predictable. This assists in future planning of cash flow.
• Flexible Investment Horizon: Discount bonds can either be short-term or long-term. Investors have a choice depending on their financial goals and liquidity needs.
• Low Start-up Costs: They are sold at low prices, meaning that investors can get into the market with less capital. This is why they can be opened up to more investors.

Besides the above advantages, the risks of discount bonds are as follows:

• Interest Rate Risk: Bond prices can drop if the market rates rise, such changes in price can amplify liquidity and reinvestment challenges in these debt instruments.
• Credit Risk: If the issuer’s returns history is unstable, there’s a chance of having delayed repayment or default.
• Inflation Risk: Fixed repayment may lose the return value if inflation rises over the bond’s value.
• Reinvestment Risk: Investors who plan to reinvest returns may face lower rates if the market conditions change. When such risks are combined with interest rate and liquidity risk, this can reduce the overall benefit of holding discount bonds.

Conclusion

Discount bonds are helpful for growing wealth because they have a considerable difference between their purchase price and face value. However, such bonds can carry risk related to interest rate changes, credit uncertainty and inflation. You can use discount bonds strategically by comparing these benefits against the limitations. Furthermore, this step allows you to get potential gains while safeguarding your investments.

Frequently Asked Questions

1. What is a discount bond?

A discount bond is sold for less than its face value. The profit for investors comes from the difference between the purchase price and the amount repaid at maturity.

2. What types of discount bonds are available?

Some of the common types of bonds issued at discounts include zero-coupon bonds, government-issued bonds, corporate discount bonds, etc. Each of them differs in risk, maturity period, and interest payment structure.

3. Are discount bonds suitable for short-term investments?

Some short-term discount bonds allow maturities under one year. However, opting for these bonds can reduce your earnings potential from the debt instrument market.

4. Can I keep discount bonds with other investments in my portfolio?

Yes, you can place discount bonds with equities, mutual funds, or stocks. This diversification can help to balance risk while improving overall returns.