What is the main purpose of a discount bond?

The main purpose of a discount bond is to attract investors with higher initial yields. A discount bond is sold at a price lower than its face value (or par value). When the bond matures, the investor receives the full face value, which means that the difference between the purchase price and the face value represents the bondholder's return on investment. This structure offers a higher initial yield compared to standard bonds sold at par, which can make them more appealing to investors looking for a better return relative to their investment amount at the time of purchase.

Investment strategies often involve seeking the best yields, and discounted bonds effectively position themselves in the market by offering a more enticing yield proposition. Such bonds can also appeal to those who anticipate rising interest rates, as they may offer a fixed return over time that can yield higher financial benefits as compared to newly issued bonds when interest rates rise.