WHAT IS COUPON…?
The term \”coupon\” is derived from the historical use of actual coupons for periodic interest payment collections.
The coupon rate is the interest rate paid on a bond by its issuer for the term of the security.
ZERO COUPON BOND
Zero coupon bonds is a bond that is issued at a discounted price and redeemed at par at the time of maturity.
Example
- Rahul has invested Rs. 920/- in a zero coupon. Assume that after 1 year he would receive Rs. 1000/- .
- In the instant case Rahul pays 920/- (Discounted price) and he would receive Rs. 1000/- (Par value) after 1 year.
- Return (yield) on the bond for Rahul is 70% and can be arrived as follows (1000 – 920) / 920.
Thus Zero Coupon Bond is nothing but a terminology used for a bond that is issued at a discounted price and redeemed at par on maturity.