Expert: Doug Ingram - 12/30/2006

Question
I would like to know what exactly is the difference between the following two financial instruments

- Zero Interest Bonds  
- Deep Discount Bonds

with reference to the Indian Capital market (or otherwise)


Answer
While most bonds have a coupon rate, zero coupon bonds are called strips because the coupon portion has been "stripped" from the bond and only the principal remains.  Thus, there is no cash flow until the final maturity so the price is usually very low for longer maturities.  The return is built into the discounted price.
A deep discount bond can be a zero coupon bond, a bond with bad credit or suspect ability to pay, or a longer bond with a very low coupon requiring more yield in the form of a lower price.