Understanding the Markets

Then we have zero-coupon bonds where instead of an interest amount

being paid at intervals the bond is issued at a discounted price and

then redeemed at the full face value (called at par), i.e. a bond with

a face value of say £1000 is issued at £800. No interest is paid and

when the bond reaches maturity the holder receives £1000. A fixed-

income bond with a face value of £1000 is issued at £1000 and then

interest is paid periodically until maturity, when the bond is

redeemed for £1000.

Indexed bonds are popular as the interest rate is set at, say, 2% and

is then ‘topped up’ if the rate of inflation or some other benchmark is

higher so that the inv