Bonds at Discounted Price

Key Highlights of Discounted Bonds:

• Buying a bond below its face value may offer a higher yield compared to its coupon rate.
• Earn an additional gain if the bond is redeemed at its full face value at maturity.
• Receive periodic interest payments as per the bond's terms.

More About Bonds at Discounted Price

Think of a bond as a financial agreement between you and the issuer. The issuer promises to repay the face value on maturity and pay interest as per the agreed terms.

However, the bond's market price can change over time. When it falls below its face value, the bond is said to be trading at a discount.

What Are Bonds at Discounted Price?

The face value of a bond generally remains fixed, but its market price can change depending on market conditions.

For example, a bond with a face value of ₹1,000 may be available in the market for ₹950. If you buy it at this price and hold it until maturity, you may receive ₹1,000 from the issuer. The ₹50 difference is your potential capital gain, in addition to the interest income you receive during the investment period, provided the issuer fulfils its payment obligations.

Why Do Bonds Trade at a Discount?

There are several reasons why bonds may be available below their face value. Some common reasons include:

1. Increase in Market Interest Rates: When new bonds offer higher interest rates, older bonds with lower coupon rates may become less attractive. Their market prices may fall as a result.
2. Change in Credit Rating: If an issuer's credit rating is downgraded, investors may demand higher returns for taking on additional risk. This can bring down the bond's market price.
3. Low Coupon Rate: Bonds offering lower interest rates may trade below face value, especially when other investment options offer better returns.

These are some common reasons behind price changes in the secondary bond market. Before investing, it is important to understand why a bond is trading at a discount.

Types of Bonds at Discounted Price

Discounted bonds can be found in different forms, depending on their interest payment structure and maturity.

Deep discount bonds and zero-coupon bonds are closely related, but they are not the same. Both can offer returns through the difference between the purchase price and maturity value.

A Simple Example of Bonds at Discounted Price

Let's understand how discounted bonds work with a simple example.

Suppose you purchase a bond with the following details:

• Face Value: ₹1,000
• Purchase Price: ₹940
• Coupon Rate: 8% per annum
• Maturity: 2 years

Here's how your investment works:

• You pay ₹940 to purchase the bond.
• You receive ₹80 as annual interest (8% of ₹1,000).
• Over two years, you receive ₹160 as total interest.
• At maturity, you receive ₹1,000 as the principal amount.

Your total receipts over the investment period would be ₹1,160, against an initial investment of ₹940.

This gives you a total gain of ₹220 over two years, before taxes and other applicable charges.

The approximate annualised Yield to Maturity (YTM) is 11.53%, assuming annual interest payments and that all payments are made on time.

This is why YTM is important when investing in discounted bonds. It considers both the interest income and the difference between the purchase price and maturity value.

Risks to Understand Before Investing in Discounted Bonds

Buying bonds below face value may look attractive, but a lower price does not always mean a better investment. Here are three important risks to consider:

1. Credit Risk: The issuer may delay or fail to make interest payments or repay the principal. Always check the issuer's financial position and credit rating before investing.
2. Liquidity Risk: Some discounted bonds may have limited buyers and sellers in the secondary market. This can make it difficult to sell your investment at the desired price.
3. Interest Rate Risk: If market interest rates increase further, the market price of your bond may fall, particularly if you plan to sell it before maturity.

Understanding these risks can help you make better-informed bond investment decisions.

How to Invest in Bonds at Discounted Price on GoldenPi

GoldenPi makes it easier to explore and invest in corporate bonds and other fixed-income securities online.

Here's how you can get started:

1. Visit GoldenPi and log in to your KYC-verified account.
2. Explore the available bonds and identify options trading below their face value.
3. Check important details such as the current market price, face value, coupon rate, credit rating, maturity date and YTM.
4. Compare different bonds and understand their potential returns and associated risks.
5. Select a suitable bond and complete the payment through the available payment options, such as NEFT or RTGS.
6. Once the transaction is successfully settled, the bonds are credited to your Demat account.

With GoldenPi, you can compare different bond investment opportunities and make investment decisions based on your financial goals and risk appetite.

Taxation on Bonds at Discounted Price

The tax treatment of discounted bonds depends on the type of bond, how long you hold it and how the income is earned.

• Interest Income: Interest received from bonds is generally taxable as per your applicable income tax slab.
• Capital Gains: Gains from selling or redeeming bonds may be subject to capital gains tax. The applicable tax rate depends on factors such as whether the bond is listed or unlisted and the holding period.

For eligible listed bonds and debentures, long-term capital gains arising from transfers on or after 23 July 2024 are generally taxed at 12.5% without indexation. However, special provisions apply to certain securities, including unlisted bonds and debentures.

It is advisable to consult a tax professional to understand the tax implications of your bond investments.

Conclusion

Bonds at a discounted price can offer investors an opportunity to earn through both regular interest payments and potential capital gains at maturity.

However, the discount alone should not be the deciding factor. It is equally important to check the issuer's credit rating, financial position, maturity period and Yield to Maturity (YTM) before investing.

At GoldenPi, you can explore different corporate bonds, compare their prices and yields, and find fixed-income investment opportunities that match your financial goals and risk appetite.

Last Updated: 8 Nov 2026