Saturday, May 9, 2009

a zero Coupon Bonds

As the term,the owner of a zero Coupon Bond receives no regular interest payments, since the bond has no coupons attached. Instead, the bond is sold at a discount from its face or redemption value. The change in value from its price at issue to its redemption value is implicit interest that the purchaser receives on the bond. for example, azero coupon bond might have a redemption value of $1,000 one year from today. A lender might purchase this bond for $900, meaning the interest on the loan is effectively $100. The implicit interest rate is than $100\$99, or 11.11 percent.

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