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Zero Coupon Bond |
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A bond which pays no coupons
, is sold at a deep discount to its face value,
and matures at its face value. A zero-coupon bond
has the important advantage of being free of reinvestment
risk, though the
downside is that there is no opportunity to enjoy
the effects of a rise in market interest rates .
Also, such bonds tend to be very sensitive to changes
in interest rates, since there are no coupon payments
to reduce the impact of interest rate changes. In
addition, markets for zero-coupon bonds are relatively
illiquid. |
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