Discount Bond
Categories: Bonds, Muni Bonds
A bond that trades or sells for less than its par value, usually because the company behind the bond is having some credit problems.
Example
Disney issues a bond with a 7% coupon. Then one day nobody watches sports anymore and ESPN's ratings go to zero. Suddenly Disney's ability to repay its bonds is suspect; there's credit risk. The bonds "trade down" on the open marketplace or at a discount of just 90 cents on the dollar. The new yield on them is .07 / .9 = 7.77%. These are now discount bonds because they trade "at a discount" to their par value of 100 cents on the dollar.