Zero coupon bonds do not pay interest and are therefore sold at a steep discount to face value depending on the maturity date of the bond. Due to the time value of money, the discount on a 30 year zero coupon bond will be much greater than on a 10 year zero coupon bond.
At maturity bondholders will receive the full face value of the bond which provides bondholders a return. For example, a 30 year zero coupon bond with a face value of $1,000 and sold for $500 would return a $500 profit after 30 years.
Holders of zero coupon bonds can sell the bonds at any time before maturity. If an investor bought zero coupon bonds prior to a steep drop in interest rates, the value of the zero coupon bonds would increase and could be sold at a profit.
They pay no 'coupon' which is the income paid periodically. You make a return by buying at a discount. As an example, if you buy a zero coupon bond for $86.26, maturing at $100 over 5 years, you would earn 3% p.a.
The advantage of buying zero-coupon bonds is that when they reach maturity, the investor then receives the full face value of the bond. These bonds became popular in the 1980's even though they were first released in the 1960's.
They are sold at discount and mature to face value over time.
(4) risk-averse investors anticipating increases in interest rates
Treasury Bond STRIPS are zero-coupon bonds STRIPPED from regular coupon paying Treasury Securities.Zero - Coupon bonds are simply bond instruments that pay no interim cash flows. Thezero coupon bond is the most simple type of transaction involving only two cash flows:• Money Invested Now (at discount)• Money Returned at Maturity (face amount)As bonds have a typical life longer than one year we tend to compare them on the basis of Yield to Maturity. The YTM of a zero coupon bond is a relatively simple concept that we will deal with in the next few paragraphs.The annual YTM of a five year zero coupon bond is simply the answer to the following question: What rate of interest would I need to earn on each of a series of successive one year investments such that my proceeds at the end of five years would be the same as they would be from having invested in the five year zero coupon bond?On occasion a similar question might be asked with the intention of ascertaining the 'Semi - Annual' YTM of a five year zero coupon bond: What rate of interest would I need to earn on each of a series of successive half - year investments such that my proceeds at the end of five years would be the same as they would be from having invested in the five year zero coupon bond? This half - yearly rate of return is, by market convention, then simply doubled so as to provide a yearly equivalent.More detail can be found on this at www.davidandgoliathworld.com
They pay no 'coupon' which is the income paid periodically. You make a return by buying at a discount. As an example, if you buy a zero coupon bond for $86.26, maturing at $100 over 5 years, you would earn 3% p.a.
The advantage of buying zero-coupon bonds is that when they reach maturity, the investor then receives the full face value of the bond. These bonds became popular in the 1980's even though they were first released in the 1960's.
Many zero-coupon bonds (e.g. US Treasuries) penalize for early redemption through forfeiture of interest for a specified period of time.
Zero coupon bonds issued by the US Treasury are issued at a discount to face value. An investor holding zero coupon bonds is paid the full face value when the zero coupon bond matures. The difference between the purchase price and the maturity value is know as the original issue discount which represents the interest earned on the zero coupon bond. Although a zero coupon bond does not pay annual interest, an investor must pay taxes each year based on the imputed receipt of income. Since the investor is not receiving interest payments during the life of the bond, taxes would be paid on interest income not actually received until bond maturity. Due to the yearly tax liability on imputed interest, it makes sense for most investors to hold zero coupon bonds in a tax deferred retirement account. The interest earned on zero coupon bonds issued by the US Treasury are exempt from state and local taxes.
Zero Coupon Municipal Bonds are special because, unlike other bonds, they have no periodic interest payments. Rather, the investor receives one payment at maturity. This payment is equal to the amount invested, plus the interest earned, compounded semiannually.
Zero coupon bonds are sold at a price well below face value. Thus, these bonds are appealing to the small investor because they can be bought far more cheaply than ordinary debt obligations. The discount is usually from 50 to 75 percent.
They are sold at discount and mature to face value over time.
If the 2 5 years are exactly the same with the exception of having coupons (same lender, same claims, same everything) then yes you should be able to. The trick is finding the right yield curve and discounting everything back to the present value. The coupons can be treated as mini zero-coupon bonds in their own right.
A zero coupon is, in a financial sense, a security which does not pay interest periodically.
(4) risk-averse investors anticipating increases in interest rates
Treasury Bond STRIPS are zero-coupon bonds STRIPPED from regular coupon paying Treasury Securities.Zero - Coupon bonds are simply bond instruments that pay no interim cash flows. Thezero coupon bond is the most simple type of transaction involving only two cash flows:• Money Invested Now (at discount)• Money Returned at Maturity (face amount)As bonds have a typical life longer than one year we tend to compare them on the basis of Yield to Maturity. The YTM of a zero coupon bond is a relatively simple concept that we will deal with in the next few paragraphs.The annual YTM of a five year zero coupon bond is simply the answer to the following question: What rate of interest would I need to earn on each of a series of successive one year investments such that my proceeds at the end of five years would be the same as they would be from having invested in the five year zero coupon bond?On occasion a similar question might be asked with the intention of ascertaining the 'Semi - Annual' YTM of a five year zero coupon bond: What rate of interest would I need to earn on each of a series of successive half - year investments such that my proceeds at the end of five years would be the same as they would be from having invested in the five year zero coupon bond? This half - yearly rate of return is, by market convention, then simply doubled so as to provide a yearly equivalent.More detail can be found on this at www.davidandgoliathworld.com
There are two kinds of bonds: coupon and zero-coupon bonds. A coupon bond pays interest on a periodic schedule--and what the schedule is depends on the bond. When you get the bond, it's got a certain number of coupons attached to it. Each one is dated and says how much interest you will receive when you redeem it. The main part of the bond is the corpus--the "body"--and when redeemed, you will receive the money you spent to buy the bond back. If you buy an investment-grade coupon bond, and its face value is $1,000, you need $1,000 to buy the bond. Note I said "investment-grade" here. If you buy a coupon bond that's in the junk category, quite often they sell at a discount from face value. But junk bonds are a world of their own. Savings bonds are zero-coupon bonds. They sell at a discount from face value--right now it's 50 percent, so if you want a $100 savings bond you need to bring $50. When the bond matures and is redeemed, you will receive the face value of the bond. There are no periodic interest payments with these bonds.