Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Deferred Interest Bond

What it is:

A deferred interest bond is a bond which pays interest in full upon maturity.

How it works (Example):

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 it Matters:

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.