Zero-Coupon and Adjustable Rate Bond
A zero-coupon bond is a debt instrument issued at a price lower than the par value of the bond. This type of investment does not make payment of interest annually, but it is subject to paying tax on interest annually despite not received it until maturity. The total return of the investment given by determining the discount rate, which will make the sum of the cash flow that is equivalent to the market value of the bond (Baaquie, 2015). The bond is based on two assumptions that are the bond cash flow can be invested back to the same bond upon maturity, and the bond will be held until maturity. Examples include the United States treasury bills.
An adjustable-rate bond is a type of debt instrument given to the holder of other outstanding bonds that have been issued. It is a debt obligation which the interest rate applies on the outstanding balance varies throughout the life of the bond. It is a long-term investment and a source of finance to the issuer (Jarrow, 2019). The major feature of the bond is that it provides provision for an investor such that if a company does not make any profit or have a negative earning, it’s not obligated to pay the interest but pay the interest when it has positive earning. Failure to pay the interest may be fully accrued, partially accrued, or not accrued depending on the bond agreements terms.
Most people shift their retirement withdrawal rate to the point that it is not close to the principal amount since people have changed the way they view money. Inflation is perpetuity and can affect any retirement investment, such as dividends, real estate, and royalties. Comparing the two debt instruments and predict that the exchange rate will change with price changes due to the effect of inflation. Based on the above principle, the 4% inflation rate will increase the withdrawal rate that is larger than the risk-free rate of the return. For example, the stock in the United States market is expected to increase by 4% by next year while the prices rise by 2%, the inflation differences between the two bonds will be 4% minus 2%.
Considering the current economic condition, the best strategies to use with bond zero-coupon bond and adjustable bond rate would be the relative economic strength concepts (Hota, Mohanty, Satapathy, & Mishra, 2019). It concentrates on economic growth rate of various countries to provide prediction and probability of direction of the exchange rate. The approach assumes that countries with a robust economic environment have a high potential growth rate hence attracting more investments.