A bond does not pay initial coupon payments but instead accrues them over a pre-determined period and then pays a lump sum at the end of that period. The bond subsequently pays regular coupon payments until maturity. Such a bond is best described as:
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A. B. C.C
The best description for a bond that does not pay initial coupon payments but accrues them over a pre-determined period and then pays a lump sum at the end of that period is a "deferred-coupon bond."
A deferred-coupon bond is a type of bond where the issuer delays the payment of coupon interest for a specific period, typically at the beginning of the bond's life. During this period, no coupon payments are made to the bondholders. Instead, the bond accrues interest, meaning that the interest is added to the principal balance of the bond. At the end of the predetermined accrual period, the bond pays a lump sum that includes the accumulated coupon interest along with the face value of the bond.
After the initial accrual period, the deferred-coupon bond starts paying regular coupon payments, typically semi-annually or annually, until the bond's maturity date. These subsequent coupon payments are based on the bond's face value and the stated coupon rate.
The main purpose of a deferred-coupon bond is to provide the issuer with temporary relief from making coupon payments during the initial period. It can be useful when the issuer expects to have limited cash flow or faces certain financial constraints in the early stages of the bond's life. By deferring the coupon payments, the issuer can reduce its immediate cash outflows and allocate the funds to other uses.
Investors who purchase a deferred-coupon bond should be aware that they will not receive any coupon payments during the initial accrual period. Instead, their returns will be realized at the end of that period when the lump sum payment is made. Subsequently, investors will receive regular coupon payments until the bond matures.
It's important to note that a deferred-coupon bond is different from a zero-coupon bond. A zero-coupon bond does not make any periodic coupon payments throughout its life. Instead, it is issued at a discount to its face value and pays only the face value at maturity. In contrast, a deferred-coupon bond eventually pays coupon interest, although it is deferred initially.
In summary, a bond that does not pay initial coupon payments but accrues them over a pre-determined period and then pays a lump sum at the end of that period is best described as a "deferred-coupon bond."