Understanding Zero Coupon Bonds

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Presentation transcript:

Understanding Zero Coupon Bonds

Zero coupon bonds is a bond that is issued at a discounted price and redeemed at par at the time of maturity.

Lets try and understand this through an illustration

Let us assume that Mr Rahul has invested Rs. 920/- in a zero coupon. Let us further assume that after 1 year he would receive Rs. 1000/- .

In the instant case Rahul pays Rs. 920/- (Discounted price) and he would receive Rs. 1000/- (Par value) after 1 year.

Return (yield) on the bond for Rahul is 8.70% and can be arrived as follows (1000 – 920) / 920

Thus Zero Coupon Bond is nothing but a terminology used for a bond that is issued at a discounted price and redeemed at par on maturity

Hope you have understood the Concept of Zero Coupon Bond Please give us your feedback at professor@tataamc.com

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