What happens if you sell a zero coupon bond before maturity?

Like virtually all bonds, zero-coupon bonds are subject to interest-rate risk if you sell before maturity. If interest rates rise, the value of your zero-coupon bond on the secondary market will likely fall.

What happens if I sell a bond before maturity?

When you sell a bond before maturity, you may get more or less than you paid for it. If interest rates have risen since the bond was purchased, its value will have declined. If rates have declined, the bond’s value will have increased. They want to realize a capital gain.

When can a zero coupon bond be sold at a discount?

A zero coupon bond generally has a reduced market price relative to its par value because the purchaser must maintain ownership of the bond until maturity to turn a profit. A bond that sells for less than its par value is said to sell at a discount.

How do you calculate the price of a zero coupon bond?

The target purchase price of a zero coupon bond, assuming a desired yield, can be calculated using the present value (PV) formula: price = M / (1 + i)^n. M is the face value at maturity, i is the desired yield divided by 2, and n is the number of years remaining until maturity times 2.

Under what situation can a zero-coupon bond be selling at par to its face value?

Unlike a coupon bond, a zero-coupon bond does not have a periodic cash flow with one lump-sum payment of the face value at its maturity. Consequently, a zero-coupon bond will be always selling at a price less than its face value and can never sell at par with its face value.

Do you pay taxes on zero coupon bonds?

Zero coupon bonds are bonds that do not pay interest during the life of the bonds. In addition, although no payments are made on zero coupon bonds until they mature, investors may still have to pay federal, state, and local income tax on the imputed or “phantom” interest that accrues each year.

Can you sell bonds whenever?

Although you’re able to sell a bond anytime there’s a willing buyer, many bondholders wait until the bond matures to give it up. Selling a bond before maturity doesn’t generate a penalty per se, but there can be costs to doing so.

What happens when you hold a bond until its maturity date?

For instance, assume you own a 10-year bond that pays a 4-percent coupon, while bonds of the same maturity currently pay 5 percent. It would be difficult to find someone willing to pay the full principal amount to receive 4-percent interest, when they could easily go and buy another bond paying 5 percent.

What does it signify if a zero-coupon bond is selling at a premium?

A zero-coupon bond is a debt security instrument that does not pay interest. Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity. The difference between the purchase price of a zero-coupon bond and the par value indicates the investor’s return.

Is a coupon bond with no maturity?

A perpetual bond, also known colloquially as a perpetual or perp, is a bond with no maturity date, therefore allowing it to be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal.

Can a zero-coupon bond be issued at par?