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Investment: An A-Z Guide by Philip Ryland

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Z

Zero-coupon bond

An innovation of the early 1980s which can be useful for financial planning because it offers a lump-sum payment at a specified date in the future. Thus, for example, a company might issue zero-coupon bonds at $60 each with the promise that in seven years it will repay $100 for every $60 borrowed. Such a bond would have a YIELD TO MATURITY of virtually 7.5% per year; that is the compound rate at which value would accrue to the bond for it to reach $100 in seven years’ time. Zeros have the added feature that they are particularly sensitive to changes in interest rates during their life, therefore they can be a good speculation for anyone betting on interest rates falling. However, in the United States the value that accrues ...

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