Q1 Why should the duration of a coupon carrying bond always be less than the time to its maturity?
Answer:
Duration is nothing but the average time taken by an investor to collect investment. If an investor receives a part of his/her investment over the time on specific intervals before maturity, the investment will offer him the duration which would be lesser than the maturity of the instrument. Higher the coupon rate lesser would be the duration.
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Q2 Write short notes on ‘Zero Coupon Bonds’.
Answer:
✓ As the name indicates these bonds do not pay interest during the life of the bonds.
✓ Instead, zero coupon bonds are issued at discounted price to their face value, which is the amount a bond will be worth when it matures or comes due.
✓ When a zero coupon bond matures, the investor will receive one lump sum equal to the initial investment plus interest that has been accrued on the investment made.
✓ The maturity dates on zero coupon bonds are usually long term. These maturity dates allow an investor for a long range planning.
✓ Zero coupon bonds are issued by banks, government and private sector companies.
✓ However, bonds issued by corporate sector carry a potentially higher degree of risk, depending on the financial strength of the issuer and longer maturity period, but they also provide an opportunity to achieve a higher return.
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