For this answer we have to know the six categories of premioum:
a. Inflation premium(more risk): high inflation means tha investors will require a higher return in order to invest at a certain project.
b. Maturity premium: the longer the duration of a project, the higher the return that investors will require.
c. Liquidity premium: the excess return that investors will require in order to invest their capital in a less desirable project on a secondary market.
d. Exchange rate risk premium: the excess return that investors will require in order to invest their capital in a foreign financial assets that has volatile exchange rate.
e. default risk premium: .... in order to invest in a more (??) project to default company
f. Real rate of interests
Coupon rate is something that is paid semiannually. The interest rate is something that starts as soon as a bond is issued.
The Federal Funds rate abbriviated as Fed Funds is the overnight loan rate between banks. The Discount Window is the Federal Reseve Bank of New York's overnight interst rate charged to banks from the Federal Reserve, called the discount window rate.
When the coupon rate (the contractual periodical "interest" payments) are lower than the yield (the market required return) the bond will be in discount. This discount makes up for the low value of the coupons.
Difference enters bond's coupon interest rate the current yield y bondholder's required rate of return?
Coupon bond= pay $A now. receive future periodic coupon and at maturity receive face value Discount bond= pay $B now. receive nothing until maturity where you receive face value. B is always less than A. That is, you pay less upfront investing in Discount Bond compared to Coupon Bond. But, you don't receive periodic cash flow by investing in Discount Bond. So clearly which is better depends on how much money you have at present and your expectation of future interest rate (going up or down). If you expect interest rate/yield to go down in the future, then clearly you don't want to be sitting on a pile of money and earn meager interest on it. This is called re-investment risk. You risk having unfavorable interest rate to re-invest the cash flow (coupon) you'll get in future. In this case, locking in the current interest rate/yield by buying discount bond is preferable. The same logic apply if you expect interest rate/yield is going to rise, in which case buying a coupon bond is preferable since you can re-invest the cash flow (coupon) you'll get in future at a higher rate. You can't do so with Discount Bond coz you receive no payment and the interest/yield is locked.
The difference between the coupon rate and the required return of a bond is dependent upon the type of bond. Junk bonds will have the biggest difference between its return and the coupon rate.
the main difference between deep discount bond and zero coupon bond is that in case of zero coupon bond no int is payable periodically while in case of deep discount bond int is payable periodically at very lower rate say 2% per annum
Coupon rate is something that is paid semiannually. The interest rate is something that starts as soon as a bond is issued.
discount rate
yes
The Federal Funds rate abbriviated as Fed Funds is the overnight loan rate between banks. The Discount Window is the Federal Reseve Bank of New York's overnight interst rate charged to banks from the Federal Reserve, called the discount window rate.
Interest rate is the amount that is paid over and above the original loan amount. Discount rate is the amount of money that is cut or reduced from the original price.
Interest rate is the amount that is paid over and above the original loan amount. Discount rate is the amount of money that is cut or reduced from the original price.
Discount factor is the factor determining future cash flow, but multiplying the cash flow to obtain present value. Discount rate is used in calculations to equal the cost of capital.
A blind discount is defined as the difference in cost between the listed cash price for equipment and the reduced financed amount. It can also be the difference between the list price of a ca and a lower interest rate.
A blind discount is defined as the difference in cost between the listed cash price for equipment and the reduced financed amount. It can also be the difference between the list price of a ca and a lower interest rate.
When the coupon rate (the contractual periodical "interest" payments) are lower than the yield (the market required return) the bond will be in discount. This discount makes up for the low value of the coupons.