Question

Assuming the issuer does not default, can capital gains or losses be a component of the holding period return on a zero-coupon bond that is sold prior to maturity?

Answer 1

Yes, because the bond's yield to maturity may have changed.

Do zero coupon bonds have a yield?

Without accounting for any interest payments, zero-coupon bonds always demonstrate yields to maturity adequate to their normal rates of return. The yield to maturity for zero-coupon bonds is additionally known as the spot rate.

What is the difference between a zero-coupon bond and a coupon bond?

Regular bonds, which also are called coupon bonds, pay interest over the lifetime of the bond and also repay the principal at maturity. A zero-coupon bond doesn't pay interest but instead trades at a deep discount, giving the investor a profit at maturity once they redeem the bond for its full face value.

Advantages Of Zero-Coupon Bond:

The Zero Coupon bonds eliminate the reinvestment risk. Zero-Coupon bonds don't let any periodic coupon payments, and hence a hard and fast interest on Zero Coupon bonds is guaranteed.

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