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Subject:  Calls of Zero Coupon Bonds? Date:  10/4/2012  3:32 PM
Author:  pauleckler Number:  34449 of 36324

Typical bonds pay interest twice each year. The interest is an expense to the issuer. Hence, as interest rates fall, the issuer is eager to call the bond and refinance at a lower interest rate.

What is the situation with zero coupon bonds? The issuer has no cash outlay each year, but still must make the big payment at maturity. For tax purposes he might claim the interest as an expense. He may even create a sinking fund to retire the bond. But the funds in the sinking fund can earn interest at current rates for years. The calculation then becomes complex.

Similarly what is the call price of a zero coupon bond. Full face value is typical for an ordinary bond, but for a zero that would make calling it very expensive. The call prices must be complex.

Is it fair to say zeros are less susceptible to call?
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