Flashcards

A bond’s yield to maturity takes into account the discount or premium paid for the bond and averages the gain (or loss) with the stated interest payment to calculate a yield over a period of time. When a bond is purchased in the secondary market at a discount, the most important yield for the investor to consider is the yield to maturity. A bond’s yield to maturity is also known as its internal rate of return.

A zero coupon bond is a bond in which a broker-dealer has separated the interest payments from the principal amount. The zero coupon bond represents the principal only. Zero coupon bonds are sold at a discount. They are also called STRIPS (separate trading of registered interest and principal). Zero coupon bonds have the highest duration since the investor receives no interest payments. The interest that accrues on a zero coupon bond is taxed each year, making them fairly unpopular investments.