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# Discount Bond: Definition, Properties, and Examples

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a. What is a discount bond? What will happen to the price of a discount bond as it
approaches maturity?

1- Given TWO (2) identical bonds with the same coupon rate but different maturity dates,
the bond with a longer maturity date is said to be more risky than the bond with a shorter
maturity date. Why?

2- A bond is called a discount bond when the selling price is lower than its par value.
Theoretically, why do discount bonds exist?

3- An increase in interest rate will result in a fall in bond prices. But the price change
experienced by a bond with low coupon rate will be much more than that of a bond with
high coupon rate. Why is this so?

#### Solution Preview

Dear Student,

The explanations on bonds below are in blue. The calculated examples are meant to clarify the explanations. In the examples, N = number of years to maturity, I = market interest rate (or yield to maturity, assuming we hold the bond until maturity), PMT = coupon interest rate (in dollars), and PV = current price of the bond. A financial calculator has been used in computations.

Best regards,