What is a Deferred Interest Bond?
A deferred interest bond is a bond which pays interest in full upon maturity.
How Does a Deferred Interest Bond Work?
A deferred interest bond, unlike most bonds, does not pay interim (coupon) payments between issuance and maturity. Rather, a deferred interest bond accrues interest over the entire term and pays a lump-sum interest payment at maturity in addition to principal. For instance, a one-year deferred interest bond with a par value of $1,000 and an annual yield of 10% would pay a lump sum of $100 in interest at the end of one year in addition to the $1,000 principal.
Why Does a Deferred Interest Bond Matter?
As an income instrument, deferred interest bonds are a good choice for long-term investors or those seeking an alternative to a savings account. The absence of coupon payments makes deferred interest bonds a poor choice for those seeking periodic income.