Zero-coupon bonds exception

The source of dollar return called reinvestment income represents the interest earned from reinvesting the bond s interim cash flows (interest and/or principal payments) until the bond is removed from the investor s portfolio. With the exception of zero-coupon bonds, fixed income securities deliver coupon payments that can be reinvested. Moreover, amortizing securities (e.g., mortgage-backed and asset-backed securities) make periodic principal repayments which can also be invested. 

In the United States, all bonds make periodic coupon payments except for one type the sero-coupon. Zero-coupon bonds do not pay any coupon. Instead investors buy them at a discount to face value and redeem them at... 

All bonds except zero-coupon bonds accrue interest on a daily basis that is then paid out on the coupon date. As mentioned earlier, the formulas discussed so far calculate bonds prices as of a coupon payment date, so that no accrued interest is incorporated in the price. In all major bond markets, the convention is to quote this so-called clean price. 

In the United States, Canada, and New Zealand, indexed bonds can be stripped, allowing coupon and principal cash flows to be traded separately. This obviates the need for specific issues of zero-coupon indexed securities, since the market can create products such as deferred-payment indexed bonds in response to specific investor demand. In markets allowing stripping of indexed government bonds, a strip is simply a single cash flow with an inflation adjustment. An exception to this is in New Zealand, where the cash flows are separated into three components the principal, the principal inflation adjustment, and the inflation-linked coupons—the latter being an indexed annuity. 

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See also in sourсe #XX -- [ ]

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