Other Bonds types¶
Zero Coupon Bonds/Zero Interest Bonds¶
Zero coupon bonds, also known as zero interest bonds, are unique debt instruments with the following characteristics:
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Interest-Free: Zero coupon bonds do not pay periodic interest (coupons) to bondholders during the life of the bond.
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Deep Discount: Investors purchase these bonds at a significant discount from their face value (par value or maturity value). The discount reflects the interest that would have been earned over time if the bond had paid periodic interest.
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Face Value at Maturity: The investor will receive the full face value of the bond when it matures. This face value is typically higher than the purchase price, representing the bond's return.
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Maturity Date: Zero coupon bonds have a predetermined maturity date when the issuer pays the bondholder the full face value. Until maturity, the bondholder receives no interest payments.
Investors in zero coupon bonds benefit from their ability to purchase bonds at a discount and receive the face value at maturity, resulting in a capital gain. These bonds are particularly attractive for long-term financial goals where compounding interest over time can significantly increase the investment's value.
Callable Bonds¶
Callable bonds, also known as redeemable bonds, are a specific type of bond with the following features:
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Early Redemption: Callable bonds allow the issuer (usually a corporation or government entity) to redeem or "call" the bonds before the scheduled maturity date. This means they can pay off their debt obligation to bondholders earlier than expected.
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Market Interest Rates: Issuers typically exercise the call option when prevailing market interest rates are lower than the bond's coupon rate. By calling the bond, they can refinance at a more favorable interest rate, reducing their interest expenses.
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Compensation for Call Risk: Callable bonds usually offer a higher interest rate (coupon rate) compared to non-callable bonds to compensate investors for the risk that the issuer may call the bonds before maturity.
Investors in callable bonds should be aware of the issuer's right to call the bonds, as this may impact the expected returns and duration of their investment. Callable bonds are considered riskier than non-callable bonds, as the timing of the call can affect the bond's yield and the investor's overall return.
Deep Discount Bonds¶
A deep-discount bond is a type of bond that is sold in the market at a considerably lower value than its par or face value. Here are the key characteristics of deep-discount bonds:
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Significant Discount: Deep-discount bonds are typically sold at a discount of 20% or more below their par value. This means that investors can purchase these bonds for a fraction of their face value.
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High Yield: Due to the substantial discount at which they are sold, deep-discount bonds offer a significantly higher yield compared to prevailing interest rates on fixed-income securities with similar characteristics.
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Credit Concerns: The deep discount on these bonds may be an indication of underlying credit concerns or increased risk associated with the issuer. Investors demand a higher yield as compensation for the potential default risk.
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Junk Level Rating: As the risk of default increases with deep-discount bonds, they may be rated as junk or speculative-grade securities by credit rating agencies. These ratings indicate a higher level of credit risk.
Deep-discount bonds can be appealing to investors who are seeking higher yields but are willing to accept the associated credit risk. These bonds can provide an opportunity for investors to profit from price appreciation if the issuer's creditworthiness improves over time, leading to a potential increase in the bond's market price. However, they also come with a higher level of risk due to the possibility of issuer default.
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