plinc business blog

Zero coupon bonds are bonds which do not pay periodic interest payments, or so-called “coupons”. Zero coupon bonds are purchased at a discount from their value at maturity. The holder of a zero coupon bond is entitled to receive a single payment, usually of a specified sum of money at a specified time in the future. Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond… @

Bonds rated BBB and higher are called investment grade bonds. Bonds rated lower than investment grade are colloquially referred to as junk bonds. The lower-rated debt typically offers a higher yield, making junk bonds attractive investment vehicles for certain types of financial portfolios and strategies. Many pension funds and other investors, however, are prohibited in their by-laws from investing in bonds which have ratings below a particular level. As a result, the lower-rated securities may be harder to sell. In some cases the limited market for junk bonds can lead to a dismal cycle in which a company with financial difficulties will have its bond rating lowered, and that makes it harder to raise money, thereby deepening the company’s financial troubles… @