What is a 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.

Advantages of Deep Discount Bonds

One advantage of a deep discount bonds is that investors may be able to earn an above-market return on them.

Disadvantages of Deep Discount Bonds

The main concern with deep discount bonds is the high risk of default associated with them. Investors could lose their entire investments in these bonds if the issuer were unable to redeem them.