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difference

aisha kapoor (90 Points)

01 March 2018

what is the difference b/w zero coupon bond and deep discount bond?

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(Guest)

Both are sold at discount.

Zero coupon means no interest or 0% interest.

Deep discount means sold at discount. And, there may be some interest payment (or coupon rate) but much lower than a regular bond. It is a general term for buying a bond at much lesser price because of its low coupon rate.

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Mohit Suresh (plus twov) (310 Points)
Replied 02 March 2018

Hi Aisha Kapoor,

1. Bond is an debt instrument yielding periodic or lumpsum income to the subscriber by the issuer over the term for which it is issued with principal being repaid at the end.

so when two words are prefixed, we can comprehend the same from the words so put in front.

2.zero coupon bond

Coupon- an interest payment made or due on a bond, debentures or any other similar debt instrument.

Zero- well simply put, what comes before one and what nobody wants to become.😋

so when combined with bond, the prominence given to this kind is "no interest over the issue period".

But investors need an income, this is provided in the form of maturity price value-Discounted issue price.

3.Deep discount bonds

Deep- Substantial,generally greater than 20%.

Discount- A deduction made at the time if payment.

what we can infer by joining bond with above is that this type of bond focuses on the discount that is given at the time of the issue, which forms substantial chunk of the issue price. No restrictions conferred on payment of interest on bonds lifetime to maturity.

But issuer needs to leverage, thus this income offered at the inception is to an extent set off by decrease in the interest rate in comparison to the coupon rate earned from regular bonds.

4. Conclusion

As mentioned by Manish above, both are issued at discount.

The thin line of difference, in short, is the coupon payment in deep discount bond, which is absent in zero coupon bond. But both are used sometimes interchangeably, just as referring to an artist who is a protagonist in James BOND😁.

Further, definition as per section 2(48) of Income tax Act ,1961, derecognises an instrument which receives any sum of money or benefits in respect of it other than at the maturity as Zero coupon bond.

Thus another difference stated by law is in the cases where specific provisions made for zero coupon bond will apply add in the case of determination of type of asset being long term or short term.

Cheers,

Mohit

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