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e. A zero-coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. [ 1 ] Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par (or face) value.
Treasury bonds (T-bonds, also called a long bond) have the longest maturity at twenty or thirty years. They have a coupon payment every six months like T-notes. [12] The U.S. federal government suspended issuing 30-year Treasury bonds for four years from February 18, 2002, to February 9, 2006. [13]
Consider a 30-year zero-coupon bond with a face value of $100. If the bond is priced at an annual YTM of 10%, it will cost $5.73 today (the present value of this cash flow, 100/(1.1) 30 = 5.73). Over the coming 30 years, the price will advance to $100, and the annualized return will be 10%. What happens in the meantime?
A zero-coupon bond is a type of bond that does not pay periodic interest — or coupon payments — like traditional bonds. Instead, they are issued at a steep discount and provide a return to the ...
Therefore, (2) some multiple (or fraction) of zero-coupon bonds, each corresponding to the bond's coupon dates, can be specified so as to produce identical cash flows to the bond. Thus (3) the bond price today must be equal to the sum of each of its cash flows discounted at the discount rate implied by the value of the corresponding ZCB.
A fixed-rate bond might offer a 4 percent coupon, for example, meaning it will pay $40 annually for every $1,000 in face value. The face (or par) value of a corporate bond is typically $1,000.
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