Why would you buy a bond above par value?

The bond will trade above par because of the inverse relationship between yield and price. An investor who buys a bond trading above par receives higher interest payments because the coupon rate was set in a market of higher prevailing interest rates. A bond may also trade above par if its credit rating is upgraded.

Why zero coupon bonds are sold at steep discounts?

Zero Coupon Bonds A zero coupon bond generally has a reduced market price relative to its par value because the purchaser must maintain ownership of the bond until maturity to turn a profit. A bond that sells for less than its par value is said to sell at a discount.

When should you buy a zero coupon bond?

“Consequentially, zero-coupon bonds are especially appropriate when investors wish to lock in a rate of return and be assured of a specific accumulation at a given future date,” he says. Experts say this makes zeros useful for investors with a predictable future need, such as paying for college or retirement.

Why do zero coupon bonds have high risk?

Zero coupon bonds are more sensitive to interest rate swings than bonds which pay interest semiannually because all the interest payments of zero coupon bonds are accumulated and paid at maturity. The longer the maturity of a bond, the greater the volatility.

What is the significance of the PAR?

Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments.

Why is a bond trading below par?

A bond may trade below par when interest rates change in the market. If prevailing interest rates rise in the economy, the value or price of a bond will decrease. This is because the coupon rate—which is a fixed interest rate—on the bond is now lower than the market interest rate.

Can a zero-coupon bond sell for more than its par value?

Unlike a coupon bond, a zero-coupon bond does not have a periodic cash flow with one lump-sum payment of the face value at its maturity. Consequently, a zero-coupon bond will be always selling at a price less than its face value and can never sell at par with its face value.

Are zero-coupon bonds riskier?

Like virtually all bonds, zero-coupon bonds are subject to interest-rate risk if you sell before maturity. Long-term zeros can be particularly sensitive to changes in interest rates, exposing them to what is known as duration risk. Also, zeros may not keep pace with inflation.

What is the meaning of zero-coupon bonds?

Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount the investor will receive when the bond “matures” or comes due.

What is the benefit of a zero-coupon bond?

A zero-coupon bond is a discounted investment that can help you save for a specific future goal. A zero-coupon bond doesn’t pay periodic interest, but instead sells at a deep discount, paying its full face value at maturity. Zeros-coupon bonds are ideal for long-term, targeted financial needs at a foreseeable time.

Why are zero-coupon bonds more sensitive than coupon bonds of equal maturity?

Because zero-coupon bonds provide no cash flow prior to maturity, their duration is equal to their maturity. Coupon-bearing bonds have durations shorter than their maturities. The longer duration of a zero means it has more interest-rate sensitivity than a coupon-bearing bond of the same maturity.