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When an instrument is issued without interest rate and issue price is thereby discounted, the issue of such instrument is called ----
- a)Light Discount bond
- b)Fixed coupon Bond
- c)Deep Discount Bond
- d)Deep zero bond
Correct answer is option 'C'. Can you explain this answer?
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When an instrument is issued without interest rate and issue price is ...
Sometimes a company issue an instrument on which rate of interest is not pre-determined. Such instruments are called Bond.
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When an instrument is issued without interest rate and issue price is ...
Deep Discount Bond
A deep discount bond is a type of bond that is issued at a significantly lower price than its face value, with little to no interest payments during the life of the bond. This type of bond is also referred to as a zero-coupon bond or a deep zero bond.
Characteristics of a Deep Discount Bond
- No interest payments: Deep discount bonds do not make periodic interest payments to bondholders. Instead, they are issued at a discount to their face value and the bondholder receives the full face value of the bond at maturity.
- Discounted issue price: The issue price of a deep discount bond is lower than its face value. The difference between the face value and the issue price represents the discount.
- Face value payment at maturity: At maturity, the bondholder receives the full face value of the bond, which is the amount that was originally borrowed by the issuer.
- Compensation through capital appreciation: The return to the investor comes from the difference between the discounted purchase price and the face value received at maturity. This capital appreciation is considered the bond's interest.
- No reinvestment risk: Since there are no periodic interest payments, there is no reinvestment risk associated with deep discount bonds.
Advantages of Deep Discount Bonds
- Higher potential returns: Due to the discounted issue price, deep discount bonds have the potential to provide higher returns compared to traditional bonds.
- Lower interest rate risk: Deep discount bonds are less sensitive to changes in interest rates compared to bonds that pay regular interest payments.
- Flexibility: Investors have the flexibility to hold deep discount bonds until maturity without the need to reinvest interest payments.
Conclusion
Deep discount bonds are issued without an interest rate and are sold at a discounted price. They offer the potential for higher returns and lower interest rate risk compared to traditional bonds. The lack of interest payments makes them attractive to investors who are looking for long-term capital appreciation.
A deep discount bond is a type of bond that is issued at a significantly lower price than its face value, with little to no interest payments during the life of the bond. This type of bond is also referred to as a zero-coupon bond or a deep zero bond.
Characteristics of a Deep Discount Bond
- No interest payments: Deep discount bonds do not make periodic interest payments to bondholders. Instead, they are issued at a discount to their face value and the bondholder receives the full face value of the bond at maturity.
- Discounted issue price: The issue price of a deep discount bond is lower than its face value. The difference between the face value and the issue price represents the discount.
- Face value payment at maturity: At maturity, the bondholder receives the full face value of the bond, which is the amount that was originally borrowed by the issuer.
- Compensation through capital appreciation: The return to the investor comes from the difference between the discounted purchase price and the face value received at maturity. This capital appreciation is considered the bond's interest.
- No reinvestment risk: Since there are no periodic interest payments, there is no reinvestment risk associated with deep discount bonds.
Advantages of Deep Discount Bonds
- Higher potential returns: Due to the discounted issue price, deep discount bonds have the potential to provide higher returns compared to traditional bonds.
- Lower interest rate risk: Deep discount bonds are less sensitive to changes in interest rates compared to bonds that pay regular interest payments.
- Flexibility: Investors have the flexibility to hold deep discount bonds until maturity without the need to reinvest interest payments.
Conclusion
Deep discount bonds are issued without an interest rate and are sold at a discounted price. They offer the potential for higher returns and lower interest rate risk compared to traditional bonds. The lack of interest payments makes them attractive to investors who are looking for long-term capital appreciation.
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When an instrument is issued without interest rate and issue price is thereby discounted, the issue of such instrument is called ----a)Light Discount bondb)Fixed coupon Bondc)Deep Discount Bondd)Deep zero bondCorrect answer is option 'C'. Can you explain this answer?
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