Deep discount bond

A deep discount bond is a bond that is trading at a substantial discount from its face value. One reason for the deep discount is that the stated interest rate on the bond is well below the current market rate. Another possible reason is that the issuer has quite a low credit rating, so that investors demand a high effective interest rate in order to hold the issuer’s bonds. The prices of deep discount bonds tend to fluctuate more widely than the prices of bonds that trade closer to their face values. Investors may have an interest in these bonds because there is a chance of earning an above-market return on them, though the risk of default can be high.