 in this section we are going to discuss the concept of a discount bond and how we can find out the yield to maturity for a discount bond a discount bond is a bond which is a discount that you buy in the market that is its face value, if the face value says that this bond is ₹1000 then you buy it at less than ₹1000 so basically discount bonds are sold and purchased in the secondary market and in that we always see that the value of this which you can buy on it that is lower than its face value and that is the reason we call this particular type of financial instrument as the discount bond we also call the discount bond as a deep discount bond but the deep discount bond is the one whose market price is more than its face value till 20% or more than that that means if you have a bond whose face value is ₹100 its market price is ₹80 or less than that so we call this type of bond as a deep discount bond now the question is that when we buy a discount bond then what benefit does the investor get what will be the advantage and how will the yield to maturity be calculated so in this context we use formula to calculate the yield to maturity that means if we take the face value of the discount bond we have to divide it from the market price and if you divide the difference from the current price then you will get the yield to maturity for the example of discount bond I would like to quote this example of the government T-Bills the government or the state bank or the central bank of a country issue T-Bills we use the short form of the T-Bills in reality it is the T-Bills the T-Bills are the instrument which is the government when short term loans are required from the people so they issue T-Bills T-Bills can be of 60 days duration can be of 30 days duration can be of 45 days can be of 90 days duration depending upon the government or the state bank for what purpose do they need this money for how long so if you have immediately if the government has immediately come to spend they have to pay the expenses they have to pay the expenses they have to repay the expenses so what does it do in that context sometimes if the state bank wants if the central bank wants they issue T-Bills so in the T-Bills we can see that the face value the current market price there is a difference that the face value will be higher and the price which they are selling that is less so in such a situation we will say that we are discount bonds we can consider it as k-form so in that if you said that the current purchase price suppose that is 900 rupees and the face value of that is 1000 rupees so if we have to remove the yield to maturity so we will remove 1000-900 100 will come in the numerator we have divided it from the current price so you will get the yield to maturity value 0.111 which can be written in the percentage form as 11.1% so you can know that if I buy the T-Bills whose face value is 1000 rupees in 900 rupees so on maturity the benefit which I will get by selling it in 1000 rupees on that I will get 11.1% yield to maturity i.e. on that I will get 11.1% return interest rate so we can consider this another important thing is that the current bond price and interest rate these are both the things which are negatively related so if your interest rate is high then your current bond price will be less and vice versa i.e. if your current bond price is high then your interest rates are low so they go in the opposite direction so when we have to make financial decision we have to invest in instrument we have to sell the money we have to take a lot of money from the interest rates so we do look at the values of interest rates and then we decide which financial instrument we have to invest in and in which not so these two things are interrelated with each other but they are negatively related with each other