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t. 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.
Zero-coupon bonds, which are issued by the U.S. Department of the Treasury, have no coupon reinvestment risk because they have no periodic coupon payments, interest being paid in full when the bond matures. Reinvestment risk is particularly important for mortgage-backed securities, because payments are received as frequently as every month.
Immunization can be accomplished by several methods, including cash flow matching, duration matching, and volatility and convexity matching. It can also be accomplished by trading in bond forwards, futures, or options. Other types of financial risks, such as foreign exchange risk or stock market risk, can be immunised using similar strategies.
Risks of fixed-income investing. 1. Credit risk. As a bond investor, your return will come from the payment of coupons and principal at the specified times, the reinvestment of those coupons, and ...
For example, if a zero-coupon bond with a $20,000 face value and a 20-year term pays 5.5% interest, the interest rate is knocked off the purchase price and the bond might sell for $7,000.
As an example of reinvestment rate risk, an investor could purchase a 10-year bond that pays 8% interest or $800 per year. When the bond matures, the investor will be paid the face value of the bond.
The owner takes on reinvestment risk, which is the possibility that the future reinvestment rates will differ from the yield to maturity at the time the security is purchased. [10] Reinvestment is not a factor for buyers, who intend to spend rather than reinvest the coupon payments, such as those practicing asset/liability matching strategies.
Zero-coupon bonds live in the investing weeds, easily ignored by ordinary investors seeking growth for college and retirement. Should ordinary investors take a look? How do they tend to do in ...