A 5 year zero coupon bond is issued with a face value of $ and a rate of 6%. Looking at the formula, $ would be F, 6% would be r, and t would be 5 years. have the same interest-rate risk. A long-term discount bond with ten years to maturity, a so-called zero-coupon bond, makes all of its payments at the end. First let us consider so-called zero-coupon bonds, those bonds that come with no coupons, just a final lump sum (usually the face value) paid at maturity T.

What is the interest rate on a zero coupon bond -

Viewing and using duration data on Fidelity. It's not so much a problem with Treasury zeros, which — like most US government issues — are pretty low-risk, but it could be a factor with corporate bond zeros or certain municipal zeros. In contrast, taxable zero-coupon bonds like corporate bonds are taxed each year on the amount of interest that has accrued for that year unless held in a tax-deferred account , even though the accrued interest is not paid to investors in that year. An investor chooses the zero-coupon bond they would like to purchase based on several criteria, but one of the main ones will be the imputed interest rate that they can earn at maturity. The cash flow of the coupons is repackaged into stripped municipals with a greater variety of maturities from six months to 40 years. Warnings You must purchase zero coupon bonds through a bank, your broker, or a commercial dealer.

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Zero Coupon Bonds

What is the interest rate on a zero coupon bond -

These include white papers, government data, original reporting, and interviews with industry experts. Call Provisions Many municipal bond issues allow the issuer to call or redeem all or a portion of the bonds at a premium or at par before maturity. Instead, you get one lump-sum payment when the bond matures. Conversely, bonds with shorter maturity dates or higher coupons will have shorter durations. Therefore, although no coupon payments are made on zero-coupon bonds until maturity, investors may still have to pay federal, state, and local income taxes on the imputed interest that accrues each year. Zero-coupon bonds are sold at a substantial discount from the face value. Here, the profit comes from interest that compounds automatically until the bond matures. The longer the maturity of a bond, the greater the volatility. These types of bonds are sold at the time of issuance for an amount less than face value. Zero coupon bonds, also known as zeros, are distinct in that they do not make annual interest payments. This is known as selling the bond at a discount.