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the main difference between deep discount bond and zero coupon bond is that in case of zero coupon bond no int is payable periodically while in case of deep discount bond int is payable periodically at very lower rate say 2% per annum

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Q: Distinguish between deep discount bond and zero coupon bond?
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How do investors make money on zero-coupon bonds?

The bond sells at a discount from its face value--sometimes a BIG discount. At the date of maturity, the bond will give you the full face value.


How do bondholders get a return on zero coupon bonds?

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.


How are Savings bonds different from other bonds?

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.


What is the size of a long coupon bond?

A long coupon bond is 8.5 x 14.


What is the size of the short coupon bond?

A short coupon bond is 8.5 x 11.

Related questions

Is the current yield greater than the coupon rate for a discount bond?

yes


Where does the interest on a 4 year zero coupon go?

It goes to the investor who buys the bond. A zero coupon bond is a bond in which, the investor need not pay any premium (coupon) above the face value of the bond while purchasing it. Let us say a company issues a $10,000 bond at a discount of 10% with zero coupon, it is enough if the investor pays $9000 to buy the bond. At the time of maturity he would get back $10,000. This 10% discount can be compared to the interest earned on the investment for the investor.


How do investors make money on zero coupon bonds?

The bond sells at a discount from its face value--sometimes a BIG discount. At the date of maturity, the bond will give you the full face value.


How do investors make money on zero-coupon bonds?

The bond sells at a discount from its face value--sometimes a BIG discount. At the date of maturity, the bond will give you the full face value.


What is usually a better investment- a coupon bond or discount bond?

Coupon bond= pay $A now. receive future periodic coupon and at maturity receive face value Discount bond= pay $B now. receive nothing until maturity where you receive face value. B is always less than A. That is, you pay less upfront investing in Discount Bond compared to Coupon Bond. But, you don't receive periodic cash flow by investing in Discount Bond. So clearly which is better depends on how much money you have at present and your expectation of future interest rate (going up or down). If you expect interest rate/yield to go down in the future, then clearly you don't want to be sitting on a pile of money and earn meager interest on it. This is called re-investment risk. You risk having unfavorable interest rate to re-invest the cash flow (coupon) you'll get in future. In this case, locking in the current interest rate/yield by buying discount bond is preferable. The same logic apply if you expect interest rate/yield is going to rise, in which case buying a coupon bond is preferable since you can re-invest the cash flow (coupon) you'll get in future at a higher rate. You can't do so with Discount Bond coz you receive no payment and the interest/yield is locked.


How do bondholders get a return on zero coupon bonds?

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.


What is the difference between yield and coupon rate?

The difference between the coupon rate and the required return of a bond is dependent upon the type of bond. Junk bonds will have the biggest difference between its return and the coupon rate.


What is the taxation of zero coupon bonds held to maturity?

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.


What is book yield?

The "book yield" is a measure of a bond's recurring realized investment income that combines both the bond's coupon return plus its amortization. It is defined as the bond's Internal Rate of Return (IRR) of all its cash flows. The following example illustrates the concept of book yield. A $100 par bond having a 5% coupon to be paid annually at year end is purchased for a $95 purchase price at the beginning of the year. The bond is set to mature in three years. In this example, the book yield will be greater than the 5% coupon on the discount bond as the investor will receive both the 5% coupon and the difference between purchase price and maturity value (an additional $5). The book yield at purchase will be 6.90%, which is the internal rate of return or IRR of the cash flows. The $5 discount is amortized into income over the life of the bond and the book value of the bond is increased until it reaches its par value of $100 at maturity.


How are Savings bonds different from other bonds?

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.


What is the size of a long coupon bond?

A long coupon bond is 8.5 x 14.


What is the size of the short coupon bond?

A short coupon bond is 8.5 x 11.