Definition of 'Discount Bond'
Discount bonds are often issued by governments or corporations when they need to raise money. They are typically sold at a discount to the face value in order to make them more attractive to investors. The discount rate is the interest rate that is used to calculate the discount.
The yield on a discount bond is the annual return that the investor will receive on their investment. The yield is calculated by dividing the discount by the face value and then multiplying by 100. For example, if a bond is sold at a discount of $100 and has a face value of $1,000, the yield will be 10%.
Discount bonds are considered to be less risky than other types of bonds because the investor is guaranteed to receive the face value of the bond when it matures. However, the yield on a discount bond is typically lower than the yield on other types of bonds.
Discount bonds can be purchased through a broker or directly from the issuer. They are typically held to maturity, but they can also be sold before maturity if the investor needs to cash in their investment.
Here are some of the advantages and disadvantages of investing in discount bonds:
* Discount bonds are less risky than other types of bonds.
* The yield on a discount bond is typically higher than the interest rate on a savings account.
* Discount bonds can be purchased at a discount, which can provide an opportunity for capital appreciation.
* The yield on a discount bond is typically lower than the yield on other types of bonds.
* Discount bonds are not as liquid as other types of bonds.
* Discount bonds may be subject to default risk.
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