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### Learn more about Zero-Coupon Bond

Related Articles. Fixed Income Essentials When is a bond's coupon rate and yield to maturity the same? Fixed Income Essentials Current yield vs yield to maturity. Fixed Income Essentials Yield to Maturity vs.

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Coupon Rate: What's the Difference? Partner Links. Related Terms Understanding Bonds A bond is a fixed income investment in which an investor loans money to an entity corporate or governmental that borrows the funds for a defined period of time at a fixed interest rate.

## What are Zero Coupon Bonds?

What is the Effective Yield? GrahamDoddFisher Apr 7th, am.

PompeyCrassus Apr 7th, pm. If I use the effective semi-annual rate for discounting I get the following.

Smagician Apr 7th, pm. Just … wow! PompeyCrassus wrote:. Simplify the complicated side; don't complify the simplicated side.

PompeyCrassus Apr 8th, pm. Smagician Apr 8th, pm.

## MCQ2 - Tutorial Q&A

Harrogath Apr 8th, pm. Wait a sec, this is not the end of this post! Appreciate it. My pleasure, Harrogath. Harrogath Apr 9th, am. Thanks for your kind words S, and your support. Really appreciate it. Pass together. Email Address. No thanks, I don't want to increase my probability of passing. You can calculate an equivalent annual rate of return on your investment by calculating how 3.

### Simple Interest

So your 3. That rate of return is called the yield to maturity and uses the effects of compounding your interest payments during a period of one year. There are bonds you can buy that actually do offer the effect of compounding interest over time. Zero coupon bonds pay you a certain amount of money at the maturity date but do not pay you any interest in the meantime. You buy the bond for less money than you will receive at maturity.

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The advantage of a zero coupon bond is you can buy a bond with the same maturity value as a regular bond but at a much lower price, since you are not receiving regular interest payments. In addition, if you buy a municipal zero coupon bond, the interest is usually tax-free.

go to link Disadvantages include the fact that you have to wait a long time for your money if you buy a corporate zero coupon bond and you take a risk based on the financial strength of the issuing company. Philippe Lanctot started writing for business trade publications in He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides.

He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.