Question

What is a bond that's issued at a deep discount and pays par at maturity (grows at a fixed rate)?

1) Zero-coupon bond
2) Convertible bond
3) Municipal bond
4) Corporate bond

Answer 1

A bond issued at a deep discount that pays par at maturity and grows at a fixed rate is known as a zero-coupon bond.

Step-by-step explanation:

The bond that's issued at a deep discount and pays par at maturity without any periodic interest payments is known as a zero-coupon bond. Investors buy these bonds below their face value, and when they mature, they receive the full face value. The difference between the purchase price and the face value represents the investor's return. Zero-coupon bonds are a form of debt securities where the issuer does not make regular interest payments. Instead, the bond grows at a fixed rate as the accrued interest is compounded automatically until maturity, at which time the bondholder is paid the original face value.