November 04, 2025
4 mins read
When I first came across deep discount bonds, I remember thinking, why would anyone sell something for less than it’s worth? It felt strange at first. But then it clicked. These bonds are simply structured in a way where you buy them at a lower price today and receive the full face value when they mature. That difference becomes your gain.
If you are looking at bonds as part of your investment plan, you’ll find many options. Some, like treasury bills, are more predictable. Others, like deep discount bonds, ask you to take on more risk in exchange for the possibility of higher returns. They are often issued by companies that need funds and may not have strong credit ratings.
A deep discount bond is priced well below its par value. The discount is not a small one; it can be 20 per cent or even more. Unlike traditional bonds, many of these do not pay regular interest. Zero-coupon bonds, for example, provide no yearly or half-yearly payments. Instead, you hold the bond until maturity and then receive the full value.
This simple design makes them easy to understand, but the trade-off is risk. The bigger the discount, the greater the chance that the issuing company may face challenges. These bonds are usually meant to attract investors who are open to balancing higher risk with possible reward.
To grasp how deep discount bonds work, the first thing I did was break it down into incremental pieces. You can imagine it like this: You purchase something at a discount today, and at some point in the future, you receive the full value of that item. That is what we are talking about.
Purchase at a discount - You purchase below face value initially.
Interest aspect - Some bonds may offer a coupon, but many do not. In these cases, the discount is your return.
Issuer profile - Deep discount bonds are sometimes issued by companies in search of money or companies with poor credit ratings.
Risk Profile - A deeper discounted bond may provide a greater return, but comes with a greater risk.
Maturity - In the end, you receive face value, and your return is the difference between your purchase price and face value.
That's it in simple terms - no hidden complexity but just a transaction with a trade-off between price, timing between payments, and placing trust on the issuer.
From a conceptual aspect, the attraction of these bonds to me was their simplicity. You know your cost, and you know your value later. But there are other dimensions:
Potential growth - Because you are starting at a lower price, the spread to maturity value can yield a notable return.
Clear structure - Their structure is simple to follow. They are less befuddling than some of the other instruments.
Long-term suitability - These bonds are ideal for goals with longer time frames.
Lower cost - To begin investing, you do not always need a high monetary amount.
Liquidity - If you have second thoughts, you can sell them on the secondary market before maturity.
In my mind, I view those as functional features that render the product accessible, but it is entirely dependent on your own financial comfort level.
Anytime I contemplate possible payouts, I always think about the risks again. With deep discount bonds, these concerns are very real:
Credit risk - If the issuer defaults, repayment could be quite uncertain.
No cash flow - Zero coupon bonds do not provide cash flow at regular intervals; they don’t lend themselves to those who depend on regular payouts.
Tax incentive - The gain you make is taxable, which also reduces the amount in your pocket.
It’s not about not using them altogether, but about recognising that higher discounts usually carry higher levels of uncertainty.
In India, NABARD has issued deep discount bonds that stand out because they are backed by a government entity. This lowers the credit risk for investors. They are offered in denominations as small as Rs. 1,000, with a minimum investment of Rs. 5,000. Another point worth noting is that the income from these bonds is exempt under the Income Tax Act, 1961. Unlike many other bonds, they can also be traded without needing a Demat account, which reduces the entry barrier.
Sometimes, the better way to understand is by comparison. Here’s how deep discount bonds sit alongside others:
Feature | Deep Discount Bonds | Zero-Coupon Bonds | Other Bonds |
Interest | May or may not carry a coupon | No interest, only gain from price difference | Regular interest payments |
Taxation | Gains are taxable | Gains are taxable | Depends on type |
Entry point | Usually lower compared to many | Usually lower compared to many | Often higher |
Risk level | Higher due to issuer profile | Moderate, often government-backed | Varies with issuer |
This kind of comparison helps me see where each option fits. Deep discount bonds may suit certain investors, but they are not a substitute for every bond type.
Deep discount bonds are not for everyone. If you’re willing to take more risks and can be patient until maturity, these can be a fun addition to your portfolio. However, if you like dependable income, or want less risk, these may be a bad fit. In short, as always, it comes down to understanding your own comfort and aligning your investments with your investing goals.
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A deep discount bond is a bond sold at a price significantly lower than its face value, often with a discount of 20% or more. The gain comes from the difference between the purchase price and the face value at maturity.
Unlike regular bonds, which pay periodic interest, deep discount bonds may not have regular interest payments. Instead, the gain comes from the price difference at maturity.
They offer the chance for significant gains if held until maturity, have a simple structure, and require a relatively low initial investment.
Risks include the issuer’s creditworthiness, lack of regular income, and the impact of taxes on gains.
They may not suit those looking for regular income but can be attractive to those seeking long-term gains and willing to take on more risk.
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