What is a deep discount bond?

A deep discount bond (DDB) is a form of bond or loan note which is issued at a significant discount to its face value. It therefore records a promise by the issuer of the bond (the borrower) to pay the bondholder, on the stated maturity date, an amount which is greater than the amount originally received.

A deep discount bond will carry a low rate of interest, and often no interest at all (in which case it may be referred to as a “zero coupon bond” or “ZCB”).

By way of example: a company may issue a deep discount bond with a term of two years, at a subscription price of Euros 75 million and with a face value of Euros 100 million. On the maturity date, the issuer must pay the bondholder the face value of Euros 100 million.

In the context of intra-group financing arrangements, deep discount bonds are commonly considered alongside Quoted Eurobonds as a method of mitigating withholding tax issues. This is because the amount of the discount (Euros 25 million in the example above) is commercially akin to interest, but is not actually interest.

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