Zero-Coupon Bond A zero-coupon bond is a debt security that doesn't pay interest but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. What if rates go up? Press down arrow to expand.
All things being equal, however, the coupon rate affects the price of bonds until the current yield equals prevailing interest rates. Popular Courses. As rates decline, current bonds with higher rates become more valuable.
Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. With premium bonds , the coupon rate is greater than market interest rates. Many bonds contain a provision that enables the issuer to buy the bond back from the bondholder at a pre-specified price prior to maturity.
The movement of bond prices and bond yields is simply a reaction to that change. To entice investors to purchase the bond despite its lower coupon payments, the company has to sell the bond at less than its par value, which is called a discount.