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DEEP DISCOUNT BOND (DDB)

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▪DDB means a financial instrument which is issued to the investors at significant discount. 

▪The DDB is considered as a safe, solid and long – term investment. Before issuing DDB, the issuer company must take credit rating for such instruments.

Example: IDBI and SIDBI had issued Deep Discount Bonds. In year 1998, DDB was offered by the IDBI @ Rs.2700/- and investors would get Rs.1,00,000/- at the time of maturity. The maturity period was fixed for Rs.25 years from the date of issue of DDB.

▪In this example, an investor can buy a deep discount bonds @ 2700/- which has the face value of such bond is Rs.1,00,000/-. Thus, if the face value of the bond is Rs.1,00,000/- and it is issued at Rs.2700, it is a deep discount.

▪On maturity, when the bond is redeemed after 25 years, the bond issuer only pays the investors the face value of the bond. Therefore, no interest is payable to investors. 

▪The capital appreciation in case of deep discount bonds is chargeable to tax at capital gains rate.

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