discount bond
Discount Bond: a bond you buy for less than its face value, so your profit comes from the gap between what you paid and what you get back at maturity.
In plain English
A lot of people hear the word bond and assume the only way to make money from it is the interest payment, so when they see a bond selling below its face value, they think something is wrong with it and walk away.
That is the calm mistake. Some bonds are built to be sold cheap on purpose, and the discount itself is the reward, not a warning sign.
A discount bond is simply a bond trading below its face value. Say a bond has a face value of ₦100,000 and pays maturity in five years, but you can buy it today for ₦82,000. That gap of ₦18,000 is not a mistake in pricing, it is the return you are being offered for tying up your money and waiting.
Some discount bonds still pay small interest along the way, others pay none at all and simply promise the full face value at the end, these are called zero coupon bonds, and they are the purest form of discount bond you will find.
A Nigerian civil servant buying FGN savings bonds might notice some series trade below face value on the secondary market, and instead of feeling like they missed a better deal, they should check whether the discount reflects a fair return for the years left before maturity.
Someone in London sending money home might come across UK gilts trading at a discount too, the logic is the same, the market has simply priced in how much waiting is worth.
You buy a discount bond with a face value of ₦50,000 for ₦41,000. At maturity, the issuer pays you the full ₦50,000. Your gain of ₦9,000 is your return, even though the bond paid no interest along the way.
Questions people ask
Why would a bond sell for less than its face value?
It usually reflects the return investors are demanding for the time and risk involved, or it can happen when interest rates rise after the bond was issued, making older bonds with lower fixed payouts less attractive unless sold cheaper.
Is a discount bond riskier than a normal bond?
Not automatically. The discount itself is not a red flag, it is simply how the return is delivered. You still need to check the issuer's creditworthiness, just as you would with any bond.
Do discount bonds pay interest?
Some do, in smaller amounts, while others, called zero coupon bonds, pay no interest at all and simply return the full face value at maturity, with the discount being your entire profit.
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