A discount bond is a type of debt instrument in which the face value of the bond is issued for less than its par or face value amount. This creates an attractive yield for investors, since the coupon payments will be higher relative to the purchase price. Discount bonds usually carry more risk than their par or face value counterparts due to the fact that investors expect higher returns from them to make up for their lower prices.

Discount bonds are often issued during periods of market uncertainty or distress, as companies seek to take advantage of investor’s appetites for higher returns. The par value of the bond is generally determined by the issuer at the time of issue and is fixed, meaning that the bondholder is not affected if the market price of the bond falls below par value. However, a discount bond will yield a higher return for the bondholder in the form of higher coupon payments and a lower purchase price.

The greater risk associated with discount bonds can limit their use as an effective tool for a company to raise additional capital. Generally, the risk of default on the debt and the associated risk of capital loss is higher in discount bonds, meaning that they may not be attractive to investors who seek a safe and steady return.

Discount bonds can be a valuable tool for investors, however, as they provide an opportunity to gain access to higher yields than those offered by other bonds. The higher yields can help to compensate for the greater risks associated, as well as to boost the overall return of a portfolio.

Overall, discount bonds can offer an attractive yield to investors who are prepared to take on the greater risks associated with them. Companies can also benefit from issuing discount bonds as it helps them to reduce borrowing costs and free up additional capital, however, the higher risk of default should be considered first.