Choosing between a deep discount bond and a loan with variable interest rate
What is the main benefit of deep discount bond issue?
Deep discount bonds appreciate faster than other types of bonds when market interest rates fall and depreciate faster when the rates rise. If interest rates increase in the economy, the existing bonds will carry lower interest payments and, thus, a lower cost of debt to the issuer.
What is Deep discount loan?
A deep discount bond (DDB) is a form of bond or loan note which is issued at a significant discount to its face value. It therefore records a promise by the issuer of the bond (the borrower) to pay the bondholder, on the stated maturity date, an amount which is greater than the amount originally received.
Is it better to buy bonds at a discount or premium?
Discount bonds can be riskier but the lower the price, the higher the potential for gains. Premium bonds can deliver higher returns with less risk, but they can be problematic if they become callable.
Why zero-coupon bond is called a deep discount bond What is interest only loan?
A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
Why would you buy a discount bond?
Discount bonds can indicate the expectation of an issuer’s default, falling dividends, or a reluctance of investors to buy the debt. Discount bonds with longer-term maturities have a higher risk of default. Deeper discounted bonds indicate a company is in financial distress and is at risk of default on its obligation.
Which bond has the highest risk of default?
Junk bonds or high-yield bonds are corporate bonds from companies that have a big chance of defaulting. They offer higher interest rates to compensate for the risk.
How do you calculate deep discount bond?
=((1000/730)^(1/5)-1)*100 => It will give the rate of interest is @ 6.50 %. Example 1 : A bond having face value or Maturity value of ₹ 2,500 is due to maturity in 3 years.
Why would you buy a bond at a premium?
A person would buy a bond at a premium (pay more than its maturity value) because the bond’s stated interest rate (and therefore the bond’s interest payments) will be greater than those expected by the current bond market. It is also possible that a bond investor will have no choice.
Which of the following are called deep discount bond *?
A zero-coupon bond is a bond that pays no interest and trades at a discount to its face value. It is also called a pure discount bond or deep discount bond.
What are the advantages & disadvantages of a zero-coupon bond?
Advantages of zero-coupon bonds
- They often have higher interest rates than other bonds. …
- They offer a predictable payout. …
- They’re very sensitive to interest rates. …
- You have to pay taxes on income you don’t get. …
- There is a default risk. …
- Bonds vs.
Why would an investor buy a zero-coupon bond?
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.
Which bond has the greatest associated interest rate risk a five year zero-coupon bond or a five year bond that pays coupons?
Answer and Explanation: A five-year zero-coupon bond has more interest rate risk.
Which of the following bonds would likely have the greatest interest rate risk?
The correct answer is d.
The longer the maturity of a bond, the higher its interest rate risk.
Which of the following bonds will tend to have the greatest interest rate risk?
A 10-year, $1,000 face value, zero-coupon bond has the greatest interest rate price risk. A bond’s interest rate risk depends mainly on two…
Are variable rate bonds attractive to investors who expect interest rates to decrease?
ANSWER: If investors expect interest rates to decrease, they would avoid variable-rate bonds because the return to the investors would be tied to market interest rates. The investors would prefer fixed-rate bonds if interest rates are expected to decrease.
Is it good to buy bonds when interest rates are low?
When all other factors are equal, as interest rates go up, bond prices go down. The reason for this inverse relationship is that when interest rates increase, new bonds offer higher coupon payments. Existing bonds with lower coupon payments must decline in price in order to be worthwhile investments to would-be buyers.
What is the relationship between interest rates and bond prices?
A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. this phenomenon is known as interest rate risk.
Why is a bond with a higher interest rate often considered a higher risk investment?
Why is a bond with a higher interest rate often considered a higher risk investment? Some companies promise higher interest rates in order to attract the attention of investors.
How do I choose the right bond?
Here are 10 tips to consider before you invest in bonds or bond funds:
- Don’t reach for yield. …
- Define your objectives. …
- Assess your risk profile. …
- Do your homework. …
- If you’re considering buying a bond fund, read the prospectus closely. …
- If you’re buying individual bonds, locate a firm and broker specializing in bonds.
Why do bond prices go down when interest rates go up don’t bond lenders like to receive high interest rates?
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
What type of bond offers the greatest tax advantage?
In general, tax-exempt municipal bonds (munis) are more attractive to those in higher tax brackets. To compare municipal bonds to taxable bonds, you need to determine the tax-equivalent yield of the muni. Though CDs carry less risk, municipal bonds have tended to outperform them.
In which situation would a savings bond be the best investment to earn interest?
A savings account keeps her savings separate from her spending money. A savings account keeps her savings separate from her spending money. In which situation would a savings bond be the best investment to earn interest? If you are putting aside a chunk of money to purchase a house in five years.
Which bond type has the lowest risk of default?
Treasury bonds are sold by the federal government. Because they are backed by Uncle Sam, Treasurys have practically no default risk and are the safest bonds to buy. Short-term Treasurys are sold with maturities ranging from a few weeks to 30 years. Treasurys are usually sold with a face value of $1,000.
Which type of bonds would investors be better off investing in if they are in a lower tax bracket?
Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they’re exempt from state and local income taxes. But corporate bonds don’t have any tax-free provisions, and, as such, are better off in tax-advantaged accounts.
How will a reduction in tax rates affect an individual’s preference for municipal bonds compared to Treasury bonds?
The reduction in income tax rates would make the tax-exempt privilege for municipal bonds less valuable, and they would be less desirable than taxable Treasury bonds.
Which of the following is most likely to happen with a convertible bond when the market price of the stock exceeds the conversion price the stock does not pay a dividend?
Which of the following is most likely to happen with a convertible bond when the market price of the stock exceeds the conversion price? The stock does not pay a dividend.