Coupon Bond vs Zero-Coupon Bond: Definition + Case Study

Coupon Bond vs Zero-Coupon Bond

A coupon bond pays regular interest; a zero-coupon bond pays no interest but is issued at a deep discount and redeemed at face value.

Definition

A conventional coupon bond pays interest at a stated rate (the coupon rate) on the face value at defined intervals (typically semi-annually in Canada) and returns the face value at maturity. A zero-coupon bond pays no periodic interest; it is sold at a discount to face value, and the investor's entire return comes from the difference between the purchase price and the face value received at maturity. For example, a zero-coupon bond with a face value of $1,000, a 5% yield, and 10 years to maturity would be priced at approximately $614. The implicit interest that accrues on a zero-coupon bond each year is taxable as income in the hands of the Canadian investor in the year it accrues, even though no cash is received until maturity - a cash-flow mismatch that makes zeros held outside a registered account tax-inefficient for most retail clients. Zero-coupon bonds have higher duration than coupon bonds with the same maturity, making them more sensitive to interest-rate changes.

Source

Income Tax Act (accrual rules for debt obligations); fixed-income pricing principles; verify specific tax treatment with CRA

Where this shows up on the CIRE

Outcome 5.1

Test yourself

Two real CIRE-bank questions on this exact outcome. Click to reveal the answer and the rule citation.

1
Under UMIR, a registered trader at a CIRO marketplace participant enters a large buy order for a thinly traded security. The trader fragments the order into many small lots throughout the session to avoid triggering an uptick in the displayed quote. A colleague flags this as potentially problematic. Which UMIR concept is most relevant?
Outcome 5.1 · click for answer
A.Best execution, because the trader is failing to obtain the best available price.
B.Gatekeeper obligations, because the branch manager approved the order.
C.Manipulative and deceptive trading, because intentionally managing orders to affect the appearance of trading activity or price formation may constitute manipulation under UMIR.Correct
D.Short sale rules, because the order involves selling borrowed securities.
UMIR prohibits trading activity that creates a misleading appearance of trading activity or that manipulates the price of a security. Deliberately fragmenting orders to manage quote impact in a way designed to create a false impression of natural market activity can fall within UMIR's manipulation provisions. This is distinct from legitimate order management strategies because the intent is to avoid natural price discovery rather than to achieve best execution for a client.
2
A client asks their RR to explain Keynesian economic theory. Which of the following best summarizes the Keynesian view on managing economic downturns?
Outcome 5.1 · click for answer
A.Keynesian theory focuses exclusively on supply-side incentives such as reducing corporate tax rates to stimulate growth.
B.Keynesian theory emphasizes controlling the money supply as the primary policy lever for economic stability.
C.Keynesian theory argues that aggregate demand drives economic activity and that government fiscal stimulus; increased spending or tax cuts; is the appropriate tool to offset deficiencies in private demand during recessions.Correct
D.Keynesian theory holds that free markets are self-correcting and government intervention worsens downturns.
Keynesian economics, developed by John Maynard Keynes, holds that aggregate demand; the total spending in an economy; is the primary driver of output and employment in the short run. When private sector demand is insufficient (as in a recession), Keynesian theory prescribes government fiscal intervention through increased public spending or tax cuts to fill the demand gap. This contrasts with monetarist theory (which focuses on money supply control, associated with Milton Friedman) and supply-side theory (which emphasizes tax reduction and deregulation to stimulate production).

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