You didn’t think you’d see the exciting word “convertible” thrown between two nerd-words like “coupon” and “bond,” did you? Well, today’s your lucky day.
A zero-coupon convertible bond is a bond that features both a zero-coupon feature (which means it pays no interest) and a convertible feature (which means you could convert the bond into a common stock).
A zero-coupon bond may sounds ludicrous, but hear us out: it doesn’t give you interest, but you can buy it at a discount and get the face value once the bond matures. So yeah...that’s how money is made off of a zero-coupon bond. What a rebel compared to other bonds, right? It’s more or less wearing yellow Elton John glasses instead of the mainstream aviators, but it manages to somehow pull it off.
Meanwhile, convertible bonds are totally wearing aviators...the classic cool-kids. Convertible, in this case, means that the bond can be converted into a stock of the issuer. Which is cool for investors, because that means they can covert when the time is right, reaping gains when the issuer's stock goes up. Just like you can roll that convertible top down when the weather is nice.
Since zero-coupon convertible bonds are a cross between the safe-nerdness of the zero-coupon bonds and the cool-kidness of the convertible bonds, investors choose it to get the best of both worlds: lower risk with the option to convert if the price is right down the road.
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Finance: What is a zero coupon bond?15 Views
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
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