Covered Bonds
February 12, 2025
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Zero-coupon bonds are those bonds that are sold at a deep discount to their face value. This means that these bonds do not receive any periodic interest. Instead, the investors have to invest a lump sum amount at the beginning of their investment and get paid a higher lumpsum amount at the end of their investment. The absence of regular periodic payments is what makes zero-coupon bonds different as compared to other types of bonds.
Zero-coupon bonds are commonly issued by governments. In this article, we will have a closer look at the pros and cons of zero-coupon bonds from an investor’s point of view:
There are many zero-coupon bonds that are already in existence. Also, each year, many new zero-coupon bonds are issued. Despite there being so many zero-coupon bonds, the issues get sold out relatively easily. These bonds are so popular because they have certain advantages. Some of the advantages of these bonds have been mentioned below:
The pros of zero-coupon bonds are quite well known and often very well-publicized. However, there are some significant cons related to zero-coupon bonds as well. Some of them have been listed below:
The bottom line is that zero-coupon bonds are high-risk financial instruments. The risk reduction of these bonds is done by obtaining a higher yield and also ensuring that money is lent out only to government agencies.
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