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Explain following bond types.
a.) Floating rate bonds
b.) Zero coupon bonds
c.) Deep discount bonds
a.) Floating rate bonds
Floating rate notes (FRNs) are the bonds which have a comparable ratio with the money market reference rate and they are also termed as variable coupon. It is made up of federal funds rate and spread which is the rate that remains constant. FRNs got the coupons where the holders can pay out the interest every three months and this is also called as quarterly coupons.
b.) Zero coupon bonds
Zero coupon bonds is also termed as discount bond or deep discount bond which is been bought at a price lower than its face value which will be given back at the time of maturity. This type of bond doesn't make payments of interest in periods. It has already been paid when the bond reaches to the maturity level and its investors are in great advantage of receiving huge about of sum equal to the initial investment Example includes U.S. Treasury bills. It is used or both long term and short term investments.
c.) Deep discount bonds
It is also been explained above in the zero coupon bonds but this kind of bond is used to sell in discount from par value. In this the bond which is selling at a discount from par value has less rates of fixed income and securities then other bonds and it also has risk profile as well. This also contains the market price of 20% or more but it is below its face value. They are a bit riskier than other similar bonds. They are also termed as low-coupon bonds and are used in long term.
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