This preview shows page 1. Sign up to view the full content.
Unformatted text preview: nd and a regular bond is that a zerocoupon bond does not pay coupons, or interest payments, to the bondholder while a typical bond does make these interest payments. The holder of a zerocoupon bond only receives the face value of the bond at maturity. The holder of a coupon paying bond receives the face value of the bond at maturity but is also paid coupons over the life of the bond. 31
31 Characteristics of Bond Zerocoupon bondholders gain on the difference between what they pay for the bond and the amount they will receive at maturity. Zerocoupon bonds are purchased at a large discount, known as deep discount, to the face value of the bond. A couponpaying bond will initially trade near the price of its face value. In other words, a zero
coupon bond gains from the difference between the purchase price and the face value, while the coupon bond gains from the regular distribution of interest.
32 Characteristics of Bond For example, imagine that you have the choices
between a one-year zero-coupon bon...
View Full Document