Discount bond
Also written Bond at a discount
A bond whose market price sits below its par value because the prevailing market interest rate is higher than its coupon — a market-price condition of an ordinary bond, not a distinct bond type.
In plain language
A bond's face value is fixed at issue. Its market price is not; it moves with interest rates. When the two diverge, the workbook gives the divergence a name.
If the market interest rate is above the coupon rate, the bond sells at a discount to its par value. Nobody would pay ₹1,000 for a bond promising a below-market coupon, so its price falls until the return it offers a new buyer catches up with what the market now demands.
This differs from a Deep Discount Bond, which is a specific product — typically a very-low- or zero-coupon instrument issued at a steep discount to face value by design, at issue. A discount bond, in this sense, can be any ordinary coupon-paying bond trading below par purely because market rates moved after issue.
How it works
The rule (Chapter 4, section 4.2). Market price and market interest rates move inversely. Comparing a bond's coupon with the prevailing market rate for similar bonds:
| Market rate vs coupon | Bond trades at |
|---|---|
| Market rate above coupon | Discount to par |
| Market rate below coupon | Premium to par (see Premium bond) |
| Market rate equal to coupon | At par |
The YTM link (section 4.4.2). The same fact can be read off yield to maturity instead of price: when a bond sells at a discount, its YTM is greater than its coupon rate. The buyer's total return includes both the coupon and the built-in capital gain to face value at maturity.
The workbook gives no fixed percentage that defines "a discount"; any price below par, however small, counts as one. How large the gap is depends on how far market rates have moved from the coupon, and on the bond's remaining maturity.
A worked example
A company issued a 5-year, ₹1,000 face value bond at a 9% annual coupon three years ago. Interest rates have since risen, and similar-quality 2-year corporate bonds now yield 11%.
No investor will pay ₹1,000 today for a bond paying only 9% when the market offers 11% on comparable paper. The price falls until its YTM, at that lower price, works out to roughly 11% — say the price settles near ₹965, a discount of ₹35, or 3.5%, to par.
An investor who buys at ₹965 and holds to maturity receives the ₹90-a-year coupon and an extra ₹35 capital gain over the remaining two years, together delivering close to the market's 11%. That built-in capital gain is exactly why YTM (about 11%) is greater than the coupon (9%) whenever a bond sells at a discount.
Why NISM asks about it
Chapter 4 (Investing in Fixed Income Securities), section 4.2, states the discount and premium rule as part of bond characteristics, and section 4.4.2 restates it through the YTM-versus-coupon relationship. Expect a question giving a coupon and a market rate and asking whether the bond trades at a discount or a premium, or the YTM-versus-coupon version of the same question.
Common exam traps
- "Discount bond" describes a market-price condition of an ordinary bond, not a distinct product — do not conflate it with a Deep Discount Bond, which is issued at a steep discount by design.
- Discount means market rate above coupon; premium means market rate below coupon. The comparison is with the current market rate, not the rate at issue.
- A bond at a discount has YTM above its coupon rate; a bond at a premium has YTM below its coupon rate.
- Rising market rates push existing bonds toward a discount; falling rates push them toward a premium — the inverse price-rate relationship, applied to a single bond rather than the whole market.
Where this is taught
Free preparation for NISM Series XXI-ARelated terms
- Deep Discount BondA zero-coupon bond of very long tenure, issued at a steep discount to its face value and redeemed at par. IDBI issued such bonds; the Kisan Vikas Patra is another example.
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Intrinsic value of a bondThe sum of the present values of all a bond's future cash flows, discounted at the investor's required rate of return. Buy if it exceeds the market price; sell if it is below.
- Premium bondA bond whose market price sits above its par value because the prevailing market interest rate is lower than its coupon — the mirror image of a discount bond.