ShmoopTube

00:00

Finance allah shmoop What is a zero coupon bond After

00:07

all this time our hero remains zero Yeah dude all

00:12

right well there was a whole song about him and

00:13

your parentsgeneration Just ask him The coupon on a bond

00:17

is its dividend or yield payment also known as the

00:21

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

00:24

Borrowing that money sofa bond has zero coupon Does that

00:27

mean the rental of that capital is free Uh no

00:31

not at all Isiro coupon bond with par value of

00:37

a thousand might sell initially for say seven hundred twenty

00:41

dollars iy a big discount to that grand the bonds

00:44

interest is on ly paid cumulatively at the very end

00:50

when the person who loaned the seven hundred twenty dollars

00:53

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

00:55

payment of a thousand bucks so many years later like

00:58

a decade of that bond yielding a bit over three

01:01

point three percent if you did the math of compounding

01:04

well this is what it would look like Note that

01:07

the amount owed at the end of the year is

01:09

mohr than what was owed the previous year and that

01:13

the interest is charged than on that amount Well in

01:16

real life these calculations are done twice a year with

01:19

bonds that is every six months the interest rates are

01:21

charged Zero coupon bonds yield notably more than normal bonds

01:25

which pay interests every six months Why Why With zero

01:29

coupon bonds yield mohr risk in paying some interest at

01:33

least some each six month period Well the bondholders getting

01:37

something back along the way and over time the interest

01:40

payments can be More than the principal loaned itself So

01:43

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

01:47

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

01:50

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

01:54

to skip town a week before the principal and interest

01:56

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

Full Transcript