Purchasing a discount bond can provide you with a way to get a bond at a price lower than the face value. A discount bond is one that is selling for less than the face value of the bond. There are a number of reasons that a bond can be traded at a price lower than the face value. Here are a few things to consider about discount bonds and whether you should consider investing in them. Every bond will have a face value attached to it. For example, if a bond has a face value of $1000, it can be sold for $900. This would be referred to as a discount bond situation. When you purchase a discount bond, that does not necessarily mean that you will get a higher yield. It only means that you are purchasing a bond for less than the face value.

Zero Coupon Bonds

One type of bond that sells at a discount is known as the zero coupon bond. Coupon payments are a term that essentially means interest payments. With a zero coupon bond, you will not receive any interest payments over the life of the bond term. This bond structure is very different from what the majority of bonds will offer investors. With a zero coupon bond, you will simply purchase the bond for a discount, and then when the bond matures, you can redeem it for the full face value. For example, you may be able to purchase a bond for $600 and then redeem it for $1000 once it matures. You are not going to receive any regular interest payments, but you will get one large payment at the end. The payment at the end of the bond term will be made up of your initial principal and all of the interest that you have earned. 

If you invest in zero coupon bonds, you need to understand how the taxes work. Even though you are not physically receiving any payments from the bond, you will still be responsible for the income that you are earning. You will have to pay taxes on money that you have not actually received. This means that you will have to come up with money from some other source in order to pay your taxes.

Secondary Market

Another situation in which bonds can be sold at a discount is in the secondary market. After an investor purchases a bond initially, they can turn around and sell it in the secondary market. If interest rates in the market rise, the value of a bond will decrease. For example, let's say that you had a $1000 bond that paid a 4 percent interest rate. If interest rates in the market increased to 6 percent, you might only find someone that will offer you $900 for the bond. This only applies if you plan on selling the bond in the secondary market instead of holding it until maturation.

blog comments powered by Disqus