Add-On Interest

Finance allah shmoop What is a zero coupon bond After

all this time our hero remains zero Yeah dude all

right well there was a whole song about him and

your parentsgeneration Just ask him The coupon on a bond

is its dividend or yield payment also known as the

rent paid by the corporation or government or individual who's

Borrowing that money sofa bond has zero coupon Does that

mean the rental of that capital is free Uh no

not at all Isiro coupon bond with par value of

a thousand might sell initially for say seven hundred twenty

dollars iy a big discount to that grand the bonds

interest is on ly paid cumulatively at the very end

when the person who loaned the seven hundred twenty dollars

gets his grand back that's it it's a one time

payment of a thousand bucks so many years later like

a decade of that bond yielding a bit over three

point three percent if you did the math of compounding

well this is what it would look like Note that

the amount owed at the end of the year is

mohr than what was owed the previous year and that

the interest is charged than on that amount Well in

real life these calculations are done twice a year with

bonds that is every six months the interest rates are

charged Zero coupon bonds yield notably more than normal bonds

which pay interests every six months Why Why With zero

coupon bonds yield mohr risk in paying some interest at

least some each six month period Well the bondholders getting

something back along the way and over time the interest

payments can be More than the principal loaned itself So

with zero coupon bonds Well there's Just a one time

payment at the very end So you'd better hope the

person showing you that money doesn't You know just decide

to skip town a week before the principal and interest

combined Or do speaking of which i've got a flight 00:02:00.288 --> [endTime] to catch No