Question

If interest rates don't change,
a. Do you expect a zero-coupon bond to experience capital gains or losses each year?
b. Same as in a. but for a coupon bond selling at a discount?

Answer 1

a.Capital gains each year

A zero coupon bond is issued at a deep discount and pays par value on maturity. It does not pay any coupon payments

Hence, the value of bond increases each year to reach par value on maturity

Hence, it leads to capital gains each year

b.Capital gains each year

The value of a coupon bond is equal to par value at maturity

Since the bond is currently trading at discount, its value will increase each year to reach par value at maturity