Difference between deep discount bond and zero coupon bond

As the bond gets closer to its maturity, the value of the bond increases.

Government Bonds

When coupon-paying bonds are broken down into their principal and coupon components such that each payment is a zero-coupon bond, such zero-coupon components are called strips. Where yield is the periodic bond yield and n refers to the total compounding periods till maturity. Given the current price or issue price of a zero-coupon bond denoted as P , its face value also called maturity value of FV and total number of n coupon payments, we can find out its yield to maturity using the following equation:.

The bonds were issued at a yield of 7. The forecasted yield on the bonds as at 31 December 20X3 is 6. Find the value of the zero-coupon bond as at 31 December and Andrews expected income for the financial year 20X3 from the bonds. You are welcome to learn a range of topics from accounting, economics, finance and more.

What is the difference between a zero-coupon bond and a regular bond?

We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Purchase Treasury zero coupon bonds if you want the best chance of having your principal and interest paid at maturity. Treasury zeros carry a lower interest rate than municipal zero coupon bonds and corporate zero coupon bonds, but they are backed by the full faith and credit of the United States. Many investors believe the safety inherent in the bonds makes up for the lower interest rate.

deep discount bond vs zero coupon bond

The bond interest income is taxed at the federal level and possibly at the state level. Consider corporate zero coupon bonds if you are looking for high interest rates and can stomach the higher risk of default. Many corporate zeros have call provisions that allow the company to call in the bond issue before the maturity date. The interest income after taxes might equal or be less than the interest paid on municipal zeros. Research municipal zero coupon bonds before you buy.

What is the difference between zero coupon bond and regular bond?

Generally, municipalities with low credit ratings have to issue their bonds at a higher interest rate to attract buyers. Also consider how long you want to own the bond. Municipal zeros pay a higher interest rate the longer you hold them, and it can take as little as one year or as long as 40 years for the bond to mature.

Municipal zeros have a lower interest rate than corporate zeros. But their income is exempt from federal and, in some cases, state and local taxes.

Zero Coupon Bonds

Contact your bank or broker with your zero coupon bond order. The bond selling price remains the same no matter who places your order, but keep in mind that a commission will be added to the bond purchase price. Use a discount broker instead of a full service broker to get a better rate on your commission fee.

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Based in St. Petersburg, Fla. She received a bachelor's degree in business administration from the University of South Florida. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.