Deep Discount Bond Definition & Example | InvestingAnswers
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- What's the difference between deep discounted bonds and zero coupon bonds? - voveqawupubo.cf Specialties!
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- Zero-Coupon Bond!
The greater the length until a zero-coupon bond's maturity, the less the investor generally pays for it. Zero-coupon bonds are very common, and most trade on the major exchanges.
Zero Coupon Bond Calculator
Corporations, state and local governments, and even the U. Treasury issue zero-coupon bonds.
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- What's the difference between deep discounted bonds and zero coupon bonds?!
- Zero Coupon Bond Value - Formula and Calculator.
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Corporate zero-coupon bonds tend to be riskier than similar coupon-paying bonds because if the issuer defaults on a zero-coupon bond, the investor has not even received coupon payments -- there is more to lose. For tax purposes, the IRS maintains that the holder of a zero-coupon bond owes income tax on the ir that has accrued each year, even though the bondholder does not actually receive the cash until maturity. The IRS calls this imputed interest.
Zero-coupon bonds are usually long-term investments ; they often mature in ten or more years. Although the lack of current income provided by zero-coupons bond discourages some investors, others find the securities ideal for meeting long-range financial goals like college tuition. The deep discount helps the investor grow a small amount of money into a sizeable sum over several years.
Because zero-coupon bonds essentially lock the investor into a guaranteed reinvestment rate , purchasing zero-coupon bonds can be most advantageous when interest rates are high. They are also more advantageous when placed in retirement accounts where they remain tax-sheltered. Some investors also avoid paying taxes on imputed interest by buying municipal zero-coupon bonds, which are usually tax-exempt if the investor lives in the state where the bond was issued.
What is a Zero-Coupon Bond A zero-coupon bond is a debt security that doesn't pay interest a coupon but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. A zero-coupon bond is also known as an accrual bond.
The price of a zero coupon bond can be calculated as: Compare Popular Online Brokers. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Zero-Coupon Convertible A zero-coupon convertible is a fixed income instrument that combines a zero-coupon bond and a convertible bond. Zero-Coupon Mortgage A zero coupon mortgage is a long-term commercial mortgage that defers all payments of principal and interest until maturity.
Bond Valuation Bond valuation is a technique for determining the theoretical fair value of a particular bond. Deep-Discount Bond A deep-discount bond is a bond that sells at a significant lesser value than par. Deferred Interest Bond Deferred interest bond is a debt instrument that pays interest in full only upon maturity.
How it works (Example):
Unlike most bonds, a deferred interest bond does not make periodic coupon payments over its lifetime. Baccalaureate Bond A baccalaureate bond is a tax-free, state-issued, zero-coupon bond that pays interest at maturity and helps families save for college tuition. Partner Links.