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State the difference between deep discount bond and zero coupon bond?
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State the difference between deep discount bond and zero coupon bond?
Deep discount bonds and zero coupon bonds are similar in the sense that both the instruments do not pay coupon interest. ... The difference between the issue price and face value is treated as interest in the case of deep discount bonds while the same difference is treated as capital gains in the case of zero coupon bonds.I hope you understand.
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State the difference between deep discount bond and zero coupon bond?
Deep Discount Bond vs Zero Coupon Bond
Definition:
- A Deep Discount Bond is a type of bond that is issued at a significantly lower price than its face value, with the difference between the two being the interest paid to the bondholder at maturity.
- A Zero Coupon Bond, on the other hand, is a bond that is issued at a discount to its face value, with no interest payments made to the bondholder during the life of the bond. Instead, the bondholder receives the full face value of the bond at maturity.
Payment of Interest:
- A Deep Discount Bond pays interest to the bondholder at maturity, which is the difference between the face value of the bond and the price at which it was issued.
- A Zero Coupon Bond does not pay any interest during the life of the bond. Instead, the bondholder receives the full face value of the bond at maturity.
Taxation:
- The interest paid on a Deep Discount Bond is taxable as per the income tax laws of the country.
- In the case of a Zero Coupon Bond, the bondholder does not receive any interest during the life of the bond. Therefore, there is no tax liability on the bondholder until the maturity of the bond when the full face value is received.
Risk Factor:
- Deep Discount Bonds are considered to be more risky than Zero Coupon Bonds because the interest paid at maturity is subject to the credit risk of the issuer. If the issuer defaults on the bond, the bondholder may lose the interest due at maturity.
- Zero Coupon Bonds are considered to be less risky than Deep Discount Bonds because the face value of the bond is guaranteed at maturity. However, there is still the risk of default by the issuer.
Conclusion:
- Deep Discount Bonds and Zero Coupon Bonds are both issued at a discount to their face value.
- Deep Discount Bonds pay interest to the bondholder at maturity, while Zero Coupon Bonds do not make any interest payments during the life of the bond.
- Deep Discount Bonds are considered to be more risky than Zero Coupon Bonds because the interest paid at maturity is subject to the credit risk of the issuer.
- Zero Coupon Bonds are considered to be less risky than Deep Discount Bonds because the face value of the bond is guaranteed at maturity.
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State the difference between deep discount bond and zero coupon bond?
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State the difference between deep discount bond and zero coupon bond? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about State the difference between deep discount bond and zero coupon bond? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for State the difference between deep discount bond and zero coupon bond?.
State the difference between deep discount bond and zero coupon bond? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about State the difference between deep discount bond and zero coupon bond? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for State the difference between deep discount bond and zero coupon bond?.
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