Discount bonds, where the purchase price is less than the face value, are a financial instrument that provides a straightforward calculation method to determine their worth. For instance, a discount bond with a face value of $1,000 and a 5% coupon rate, bought for $900, offers an 11.11% yield to maturity.
Understanding “discount bond how to calculate” proves invaluable for investors seeking higher returns while mitigating risk. It allows for calculating the present value of future cash flows, essential in evaluating investment opportunities and optimizing portfolio management. Historically, discount bonds played a pivotal role during World War I and II, enabling governments to raise funds at lower interest rates.