A bond that pays a small interest rate over its life, but requires a large payment of principal at maturity. This bond, therefore, allows its holder to receive capital gains in consideration for invested funds. By nature, low rate bonds trade at a deep discount to par. A deep discount bond with a low coupon rate means that the bond’s return will essentially consist of capital gains (since the holder paid a low price and will receive a higher price upon maturity). By holding low rate bonds, an investor can enhance his after-tax yield because capital gains are typically taxed at a much lower rate than interest income.
This bond is also known as a low-coupon bond.
