A bond that accrues interest over its life. Accrued interest is only payable at the maturity date of the bond. More specifically, a discount bond doesn’t pay interest during its life, but rather it is typically sold to investors at a deep discount from its face value (i.e., the amount a bond will be worth at its maturity or due date). When this bond matures, the holder will receive one lump sum equal to the initial amount paid to buy the bond plus the accrued or imputed interest.

Discount bonds come in different forms including government treasury bonds, corporate bonds, and bonds issued by local government entities, etc. Once issued, discount bonds trade in the secondary markets where issuers have no control over such debt claims until maturity date. Because discount bonds pay no interest until maturity, their prices fluctuate more than other types of bonds in the secondary market.

Discount bonds are also known as zeros, zero coupon bonds, or deep discount bonds.