2 responses so far ↓

• 1 MelatoninDeficient // Apr 15, 2008

  Coupon bonds will give you periodic interest equal to the coupon rate.

  Zero-coupon bonds give you periodic interest equal to zero. A discount bond is a zero-coupon bond. It does not make any periodic interest payments. The face value is paid at the time of maturity only. So you have to wait until maturity to get back your principal amount, plus interest, the total of which will be the face value. It is called a discount bond only because your principal amount is at a discount from the face value at the time of purchase.

  Thinking about this intuitively, a coupon bond returns some portion of the amount it owes you well before maturity. A discount bond makes you wait until maturity to get anything. What if the issuer goes bankrupt? The longer you wait, the greater the probability of bankruptcy. So the interest rate risk is higher with discount bonds.

• 2 John D // Apr 15, 2008

  By same length, I assume you mean the maturities are the same. You can interpret duration as the sensitivity of the bond price to changes in interest rate levels. Since, duration is lower on coupon bonds than discount bonds, they are less sensitive to changes in interest rate level, hence has less exposure to interest rate risk.

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