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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. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons , hence the term zero-coupon bond.
A zero-coupon bond is a type of bond that does not pay periodic interest — or coupon payments — like traditional bonds. Instead, they are issued at a steep discount and provide a return to...
In finance, bootstrapping is a method for constructing a (zero-coupon) fixed-income yield curve from the prices of a set of coupon-bearing products, e.g. bonds and swaps.
Treasury bills (T-bills) are zero-coupon bonds that mature in one year or less. They are bought at a discount of the par value and, instead of paying a coupon interest, are eventually redeemed at that par value to create a positive yield to maturity.
The zero-coupon bond will have the highest sensitivity, changing at a rate of 9.76% per 100bp change in yield. This means that if yields go up from 5% to 5.01% (a rise of 1bp) the price should fall by roughly 0.0976% or a change in price from $61.0271 per $100 notional to roughly $60.968.
When dealing with the Black-Scholes model, we may equally well replace the savings account by the risk-free bond. A unit zero-coupon bond maturing at time is a security paying to its holder 1 unit of cash at a predetermined date in the future, known as the bond's maturity date.
Consider a 30-year zero-coupon bond with a face value of $100. If the bond is priced at an annual YTM of 10%, it will cost $5.73 today (the present value of this cash flow, 100/(1.1) 30 = 5.73). Over the coming 30 years, the price will advance to $100, and the annualized return will be 10%.
It is tax deductible for the corporation paying it. For US dollar corporates, the coupon is almost always semiannual, while Euro denominated corporates pay coupon quarterly. The coupon can be zero. In this case the bond, a zero-coupon bond, is sold at a discount (i.e. a $100 face value bond sold initially for $80). The investor benefits by ...
The interest rates implied by the zero coupon bonds form a yield curve, or more precisely, a zero curve. Thus, specifying a model for the short rate specifies future bond prices. This means that instantaneous forward rates are also specified by the usual formula.
Zero-coupon bonds (zeros) pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is Series E savings bonds issued by the U.S ...