What is Zero Coupon Bond
This is an accrual bond that does not pay the interest but trades at a major discount, giving a profit at maturity when the bond is taken out for its total face value.
Understanding Zero-Coupon Bonds
Some bonds are identified as zero-coupon instruments from the beginning. Other bonds are coverted into zero-coupon instruments after a specific institution takes away their coupons. As they offer the funds at maturity, zero-coupon bonds can fluctuate in price. This fluctuation can be much more than coupon bonds.
Advantages Of Zero-Coupon Bond
No reinvestment risk: Other coupon bonds don't let investors to a bond's cash flow at the same rate as the investment's required rate of returns. The Zero Coupon bonds eliminate the reinvestment risk. Zero-Coupon bonds do not let any periodic coupon payments, and hence a fixed interest on Zero Coupon bonds is guaranteed.
Fixed returns: The Zero Coupon bond is a perfect choice for those who prefer long-term investment and earn a lump sum. The intention behind this is the assurance of a fixed return, granted the investment has been kept until maturity.
Long-time horizon: The long time horizon is an important advantage for long-term investors. Long-term investment can avail a fixed amount without worrying about any market turmoil.
