My hunch for ordering total interest payment is: zero coupon > discount> premium, because zero coupon issurer takes advantage of time value of money (he never pays coupon), and need to pay higher total interest in the end. However, after examination of the following example, the result is exactly against my thought. Bond A (premium): I/Y = 5%, PMT = 600, FV= 10,000, N=6 --> PV = 10,508 Bond B (discount): I/Y = 5%, PMT = 400, FV = 10,000, N=6 --> PV = 9,492 Bonc C (zero coupon): I/Y = 5%, PMT = 0, FV = 10,000, N=6 --> PV = 7,462 Total interest for each Bond A: 3,600 - 508 = 3,092 Bond B: 2,400 + 508= 2,908 Bond C: 10,000 -7,462 = 2,538 What’s the retionale behind this? why does a zero coupon bond issuer end up the paying the least amount of total interest?
Anyone could help? Thanks.
Have a look at the coupon… you pay the lower price because you dont get any coupon
Right - would you rather have a) $1000 in a year or b) $1000 in a year + $30 in 6 months + another $30 in 12 months. I’ll take b).
JoeyDVivre Wrote: ------------------------------------------------------- > Right - would you rather have a) $1000 in a year > or b) $1000 in a year + $30 in 6 months + another > $30 in 12 months. I’ll take b). lol…me tooo