What is a Deferred Interest Bond?

A deferred interest bond is a bond that provides for either reduced or no interest in the beginning years of the bond term, and compensates for it with increased interest later in the bond term. Since this type of bond is associated with firms having short-term cash flow problems, the full-term average interest rate can be high. The high rate of interest is demanded by investors, who feel that these bonds are high-risk.

An example of this type of bond is the zero-coupon bond, for which there is only a single payout at the maturity date.