Discount Bond

A discount bond trades below par (price <100), meaning you pay less than face value. This happens when the bond's coupon rate is below current market yields — investors demand a discount to compensate for below-market income. For example, a 3% coupon bond trades at 95 when market yields are 4%. Capital gain at maturity: If held to maturity, discount bonds appreciate to par (100), generating a capital gain in addition to coupon income. Tax treatment: The difference between purchase price and par (called market discount) is taxed as ordinary income at maturity, not capital gain. Duration: Discount bonds have longer duration than premium bonds with the same maturity because more of the return comes from the par repayment (farther in the future).