Question

Question 2: What is a bond? Briefly discuss the difference between a coupon bond and a zero coupon bond. What are the characteristics of each? Define par value as it relates to a bond.

Answer 1

Bond is a debt instrument which has coupon payments and par value at end of maturity period. Bonds are rated by credit rating agencies. Yields in bonds are tax deductible. It is used by companies to raise debt.

Coupon bonds pay regular fixed annual or semi annual payments. They can be discount bonds, premium bonds or par value bonds.Zero coupon bonds are discount bonds and do not pay regular payments but par value is received at the end of bond period.
Coupons bond are less sensitive to interest rate changes than zero coupon bonds.The duration of zero coupon bonds is more than duration of coupons.

Par Value is the face value of bond received at maturity.The coupons are calculated as percentage of par value.