Question

Compare and contrast between bonds issued with coupon rate and zero-coupon bonds

Answer 1

Answer:

Compare and Contrast

• Both bonds have face values.
• Bond with coupon rate pays the interest whereas zero-coupon bond does not pay such interest periodically.
• Bond with coupon rate is issued on the market value whereas zero-coupon bond is issued on deep discount value.
• A Zero-coupon bond is more volatile than a bond with a coupon rate.
• Usually zero-coupon bond has a higher yield rate than a bond with a coupon rate.
• A zero-coupon bond may also help to save taxes whereas a bond with a coupon rate has tax consequences for the investor due to interest income.

Explanation:

Bond with a coupon rate

The bond issued with coupon rate has an interest rate which is used to calculate the interest payment or income. This bond is issued on the market value.

Zero-coupon Bond

The zero-coupon bond is a bond that does not have any interest and does not pay interest or receive interest income. This bond is issued at a deep discount value.