Markets · 6 pages · 12 min
Why a discount bond exists
A bond sells below face when its coupon alone would not match the yield buyers now require.
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From the opening
A discount bond is a bond whose market price sits below the face amount the issuer promised to repay at maturity. The gap lets a buyer who receives a thinner coupon than today's required yield still earn a competitive result as the price moves toward face. The opening covers price sits below face, a thin coupon needs a gap, and zero-coupon bonds are pure discount.
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Inside
- Price sits below face
- A thin coupon needs a gap
- Zero-coupon bonds are pure discount
- Credit markdowns are different
- Where the idea stops applying
- A distinction worth keeping
Sources
- Discount to par
- Zero-coupon bond pricing