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Zero-Coupon Bonds

A zero-coupon bond is a bond with no coupon rate. Investors in these securities do not receive any interest payments during the life of the bonds. Instead, they purchase zero-coupon bonds at a deep discount to par and receive a lump sum on maturity.

This course will describe the motivations to invest in a zero-coupon bond. The course will also provide an overview of 'stripping', the process of separating out each coupon payment and the principal payment from a standard coupon-paying bond. Finally, this course will describe how to derive a zero-coupon yield curve from par-coupon rates and describe the risks associated with investing in zero-coupon bonds.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Identify the basic features and characteristics of zero-coupon bonds, including strips

    Derive a zero-coupon yield curve from the par-coupon rates in the market

    Recognize the risks associated with investing in zero-coupon securities

  • COURSE OUTLINE

    Topic 1: Overview of Zero-Coupon Bonds

    What is a Zero-Coupon Bond?

    Zero-Coupon Bonds Vs. Conventional Bonds

    Pricing a Zero-Coupon Bond – An Example

    Why Invest in Zero-Coupon Bonds?

    Zero-Coupon Bonds – Variations

    o Callable Zeros

    o Deffered Interest Bonds

    o Payment-in-Kind Bonds (PIKs)

    o Inflation-Indexed Zeros

    Strips

    o Origins of Coupon Stripping

    o US Treasury STRIPS

    Topic 2: Zero-Coupon Yield Curves

    Internal Rate of Return

    Par-Coupon Yield Curves

    o Setting up of Par-Coupon Yield Curves

    Problems Using IRR to Value Securities

    Zero-Coupon Yield Curves

    o Deriving the Zero-Coupon Yield Curve

    Present Value Factors

    o Deriving Present Value Factors

    • Deriving Zero-Coupon Yield Curve Algebraically

    Pricing Non-Coupon Bonds Using Present Value Factors

    Forward Yield Curves

    Topic 3: Risks of Zero-Coupon Bonds

    Market Risk

    o Price Sensitivity

    o Duration

    • Modified Duration

    • Dollar Duration

    o Convexity

    Credit Risk

    Reinvestment Risk

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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