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Deep Discount Bond

A deep discount bond is a bond that is sold at a price significantly below its face value but pays the full face value at maturity. These bonds are usually issued with little to no periodic interest payments (often as zero-coupon bonds), meaning that the investor's profit comes primarily from the difference between the discounted purchase price and the bond’s face value. Deep discount bonds are attractive to long-term investors seeking capital appreciation rather than income from interest payments. These bonds can be risky, especially if the issuer’s financial stability is questionable, as the investor must wait until maturity to realize a profit.

Example

A bond with a face value of $1,000 might be sold for $600, providing the investor a $400 gain at maturity.

Key points

• Sold at a significant discount to face value.

• Offers capital appreciation rather than interest payments.

• Typically zero-coupon, meaning no periodic payments.

Quick Answers to Curious Questions

Investors are attracted by the potential for capital gains when the bond matures, especially if interest rates are low.

The main risk is that the issuer may default, causing the bondholder to lose their investment.

Deep discount bonds are sold at a lower price and provide capital gains upon maturity, while traditional bonds usually offer periodic interest payments.