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Volatility and interest rate risk: Without regular interest payments to cushion price fluctuations, zero-coupon bonds are more volatile than short-term bonds. In general, the current value of any ...
In finance, bootstrapping is a method for constructing a (zero-coupon) fixed-income yield curve from the prices of a set of coupon-bearing products, e.g. bonds and swaps. [ 1 ] A bootstrapped curve , correspondingly, is one where the prices of the instruments used as an input to the curve, will be an exact output , when these same instruments ...
The Z-spread is widely used as the "cash" benchmark for calculating the CDS basis. The CDS basis is commonly the CDS fee minus the Z-spread for a fixed-rate cash bond of the same issuer and maturity. For instance, if a corporation's 10-year CDS is trading at 200 bp and the Z-spread for the corporation's 10-year cash bond is 287 bp, then its 10 ...
When a coupon-bearing bond sells at; a discount: YTM > current yield > coupon yield; a premium: coupon yield > current yield > YTM; par: YTM = current yield = coupon yield. For zero-coupon bonds selling at a discount, the coupon yield and current yield are zero, and the YTM is positive.
For example, if a zero-coupon bond with a $20,000 face value and a 20-year term pays 5.5% interest, the interest rate is knocked off the purchase price and the bond might sell for $7,000.
Zero coupon bonds have a duration equal to the bond's time to maturity, which makes them sensitive to any changes in the interest rates. Investment banks or dealers may separate coupons from the principal of coupon bonds, which is known as the residue, so that different investors may receive the principal and each of the coupon payments.