A bond discount occurs when a bond trades in the secondary market at a price below its face (par) value — meaning investors can purchase the bond for less than the amount they will receive at maturity. Bond discounts arise primarily when prevailing market interest rates have risen above the bond's coupon rate since issuance — making the existing bond's fixed coupon less attractive relative to newly issued bonds offering higher yields, so investors demand a lower price as compensation. For example, a ₹1,000 face value government security with a 7% coupon trading at ₹950 is at a discount of ₹50 (5%). The yield to maturity (YTM) on a discounted bond exceeds its coupon rate — reflecting both the periodic coupon income and the capital gain from the bond's price appreciation as it moves toward par value at maturity. In India, discount bonds frequently appear in the secondary G-Sec market during periods of rising interest rates — such as the 2022-2023 RBI rate hike cycle when existing fixed-rate government bonds fell sharply in price. For investors, buying bonds at a discount to par is not necessarily a bargain — it simply reflects the higher yield required to compensate for the below-market coupon rate relative to current prevailing rates.
For android only
