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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.

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Q: What is usually a better investment- a coupon bond or discount bond?
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Continue Learning about Economics

What is the coupon value?

The coupon value is usually 1/000 of a cent. They can also be 1/20 or 1/1000 of a cent. The face value is how much the coupon takes off your bill.


Relationship between required rate of return and coupon rate on the value of a bond?

required rate of return is the 'interest' that investors expect from an investment project. coupon rate is the interest that investors receive periodically as a reward from investing in a bond


When a bonds stated interest rate is less than the market interest rate is the rate at a discount or premium?

When the coupon rate (the contractual periodical "interest" payments) are lower than the yield (the market required return) the bond will be in discount. This discount makes up for the low value of the coupons.


If a coupon bond is selling at par does the current yield equal its yield to maturity?

Yield usually refers to yield to maturity. If a bond is trading at par it usually means the yield to maturity is equal to the coupon.


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.

Related questions

How are investors in zero coupon bonds compensated for making such an investment?

They are sold at discount and mature to face value over time.


What can I do with a Sears coupon code?

A Sears coupon code can be used for online shopping much like you would use a physical coupon at the store. The restrictions for a 25% discount coupon for Sears are usually printed out with the code, each discount may be different depending on when it is offered.


Where can I spend a discount tire coupon?

You can spend a discount tire coupon at sears, walmart, good year and maybe also at pepboys. It is much much better if you will call them first before you go to purchase.


How do you find a coupon code?

You can get discount codes from different discount offering sites such as Coupon Refund, Retail Me Not. These are best sites for coupon and discount codes. Check the lick to get free and updated discount codes.


How can I apply a discount to an Apple Ipod?

It depends on where you are applying a discount to an Apple Ipod, if you have some form of coupon form the manufacturer, you may use this coupon in person at the retail store. If you have a specific discount code for an online website you usually enter the code at the point of purchase.


Discount coupon for The Israel Conference?

$30 discount with this code - Magic53


What is the difference between a discount coupon and a special coupon in marketing?

discount coupons are something given for a specific discount, probably happens often. a special coupon is when there is a special run. doesn't happen often and has a short exp window.


Can I get a code or coupon to discount the price of a Fossil watch?

Yes a code or coupon can be aquired for a discount on the price of a Fossil watch. Such codes can be acquired from sites including Retail Me Not and Coupon Cabin.


Does Running Warehouse do a discount coupon?

You can generally find a running warehouse discount coupon on one of the discount coupon websites. So many of these coupon sites are springing up because everyone is looking for a bargain. Some cannot be used in conjunction with other offers or reductions, so do check the terms on each, but a running warehouse discount coupon will certainly save you money on many of their products.


How do you use a Garnet Hill coupon on their website?

The coupon that you have must have a coupon code. If it has a coupon code, then you can type it in at the checkout in order to get the discount.


What information is on a coupon?

Coupon usually contains the information including; expiry date, name of merchant (which offer the coupon), coupon syntax (the description about the discount that customer gets), and promotion code if any. The best online coupons usually have all these information. So for getting best online coupons see the link. thanks


How do you spell cupon?

The likely word is coupon (paper slip, typically for a discount on a price).