Zero coupon bonds is a bondthat is issued at a discounted price and redeemed at par at the time of maturity.
Lets try and understandthis through an illustration.
Let us assume that Mr. Rahulhas invested Rs. 920/- in a zero coupon. Let us further assume that after 1 year he would receive Rs. 1000/- .
In the instant case Rahul pays Rs. 920/- (Discounted price) and he would receive Rs. 1000/- (Par value) after 1 year.
Return (yield) on the bondfor Rahul is 8.70% and can be arrived as follows (1000 – 920) / 920
Thus Zero Coupon Bond is nothing but a terminologyused for a bond that is issuedat a discounted price andredeemed at par on maturity.
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