Bonds at Discounted Price

Think of a bond like a fixed claim. The issuer will pay back the face value at maturity. The market price is just what someone is willing to sell that claim for today.

What are Bonds at Discounted Price?

A bond's face value is fixed for its whole life. The market price changes every day. When the market price drops below the face value, the bond is said to be trading at a discount.

For example, a bond with a face value of Rs. 1,000 might trade at Rs. 950 today. If you buy bonds below par value, you pay Rs. 950 now. At maturity, you receive the full Rs. 1,000. The Rs. 50 difference is your capital gain. This is in addition to the coupon paid through the holding period.

Why Bonds Trade at a Discount:

Bonds trade below face value for three common reasons:

1. Market interest rates have gone up. If a bond was issued at 7% but new bonds are paying 8%, the older bond's price falls to make its yield match the market.
2. The issuer's credit rating has weakened. Buyers demand a higher return, so the price drops to lift the yield.
3. The bond is close to maturity with a low coupon. The price drifts toward face value but may slip slightly below.

These are the typical reasons behind secondary market bond discounts you see on listed bonds.

Types of Bonds at Discounted Price

The category covers a few variations:

Deep-discount bonds and zero-coupon bonds give you the entire return at maturity. There is no monthly or annual coupon in between.

A Simple Example

Say you buy a Rs. 1,000 face value bond at Rs. 940. The bond carries an 8% coupon and matures in 2 years.

Over 2 years, you receive Rs. 80 a year as a coupon. That is Rs. 160 in total. At maturity, you also get back Rs. 1,000 (the face value). You paid Rs. 940 to buy it.

Your total inflow is Rs. 1,160. Your outflow was Rs. 940. The gain is Rs. 220 over 2 years. The yield-to-maturity (YTM) on this position works out to about 11.3% per year. The YTM is higher than the 8% coupon because you bought the bond at a discount.

Risks to Understand

A discount does not always mean a good deal. The discount usually exists for a reason. Three risks to understand:

1. Credit risk. If the discount reflects a rating downgrade, the issuer may fail to pay back fully. The lower price is the market pricing for higher risk.
2. Liquidity risk. Discounted bonds sometimes trade thinly on the exchange. If you want to exit early, you may not find a buyer at a fair price.
3. Interest rate risk. If market rates rise further, the price of your bond can fall more before maturity.

How to Invest in Bonds at Discounted Price on GoldenPi

The process is simple:

1. Log in to your KYC-verified GoldenPi account.
2. Open the Bonds at Discounted Price section.
3. Each listing shows the current price, the face value, the coupon, the maturity, and the YTM.
4. Compare the YTM with the coupon before you buy bonds below par value.
5. Pay through NEFT or RTGS from your bank account.
6. The bond enters your demat after settlement.

Taxation

The coupon you receive is taxed at your slab rate. Once annual interest from one issuer crosses Rs. 10,000, TDS at 10% applies to listed corporate NCDs (Section 193 of the Income Tax Act).

The discount you capture at maturity is treated as a capital gain. For listed bonds held over 12 months, this is taxed at 12.5% without indexation under the Finance (No. 2) Act, 2024. Shorter holdings are taxed at a slab rate. Note that the term "capital gains bonds" in this context refers to bonds that give you a capital gain through the discount, not the separate 54EC capital gains bonds used for property sale tax exemption.

Conclusion

Bonds at a discounted price can give you both a coupon and a capital gain. The combination usually pushes the YTM above the bond's stated coupon. That is why YTM is the right measure when you buy bonds below par value, not just the coupon rate.

A discounted price is not automatically attractive. The reason behind the discount is the more important question. A bond may be at a discount because interest rates have risen elsewhere. Or because the market is pricing in trouble at the issuer. The two situations carry very different risk profiles.

GoldenPi shows the live price, YTM, and rating on each listing. The offer document and the issuer's recent results are the right starting points for the rest of your due diligence.

Top 5 Bonds at Discounted Price