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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.