What type of bond pays little or no interest initially, then increases to a higher rate later?

What type of bond pays little or no interest initially, then increases to a higher rate later?

• A. Split Coupon Bonds
• B. Zero Coupon Bonds
• C. Callable Bonds
• D. Fixed Rate Bonds

Answer: (A)

The correct answer is split coupon bonds. Split coupon bonds are designed to pay little or no interest during the initial period, meaning that the bondholder receives minimal cash flow initially. However, as the terms of the bond progress, the interest payments increase to a higher rate. This structure can make split coupon bonds attractive to certain investors, particularly those who may not need income from the bond during the early years and expect the bond's value to appreciate. Zero coupon bonds, on the other hand, do not pay periodic interest at all; instead, they are sold at a discount to their face value and mature at par value. Callable bonds provide the issuer the option to redeem the bond before maturity, typically when interest rates fall, but they do not feature an initial low-interest payment that increases later. Fixed rate bonds pay a consistent interest rate throughout the life of the bond. In summary, split coupon bonds uniquely match the description of starting with lower interest payments and increasing later on, distinguishing them from other types of bonds.

The correct answer is split coupon bonds. Split coupon bonds are designed to pay little or no interest during the initial period, meaning that the bondholder receives minimal cash flow initially. However, as the terms of the bond progress, the interest payments increase to a higher rate. This structure can make split coupon bonds attractive to certain investors, particularly those who may not need income from the bond during the early years and expect the bond's value to appreciate.

Zero coupon bonds, on the other hand, do not pay periodic interest at all; instead, they are sold at a discount to their face value and mature at par value. Callable bonds provide the issuer the option to redeem the bond before maturity, typically when interest rates fall, but they do not feature an initial low-interest payment that increases later. Fixed rate bonds pay a consistent interest rate throughout the life of the bond. In summary, split coupon bonds uniquely match the description of starting with lower interest payments and increasing later on, distinguishing them from other types of bonds.