Question

True or False and why?

1. A call provision gives the issuer the right to all the bonds for redemption. In general, companies call bonds if interest rates rise and do not call them if interest rates decline.

2. A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at a discount. These bonds provide compensation to investors in the form of capital appreciation.

Answer 1

1. False

Price of bond Vs interest rate for bond is inversely proportional. When interest rate get increased price of bond will be decreased hence in this case company won't call bond i.e. in other words it won't go for redemption before maturity. Hence we can say capital appreciation won't be applied to zero coupon bond as against other types of bonds where capital appreciation is depending upon the fluctuations in interest rate.

2. False

Zero coupon bond are typically get paid when they redeemed at its par value i.e. at face value at the time of maturity. Till then there is no payment schedule decided as it is case with other Bo ds