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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Which of the following is a feature of a debenture with a 'deep discount' structure, such as a zero-coupon bond?

A deep discount or zero-coupon bond is issued at a substantial discount to face value and redeemed at par on maturity, with no periodic interest paid. The investor's return is the gap between issue price and redemption value.

  1. AIt pays interest every six months at a fixed coupon
  2. BIt is issued at a large discount to face value and no periodic interest is paidCorrect
  3. CIt is convertible into equity shares at the option of the company only
  4. DIt carries a floating rate linked to a benchmark

Explanation

A deep discount or zero-coupon bond is issued at a price well below its face value and redeemed at face value on maturity. The investor's return is the difference between the two, with no periodic interest. Option A describes a regular coupon bond and D a floating rate bond.

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