Bonds pay interest that can be fixed, floating or payable at maturity. Most bonds carry an interest rate that stays fixed until maturity and is a percentage of the prinicpal amount. Typically, investors receive interest payments semi-annually. For example, a EUR1,000 bond with an 8% interest rate will pay investors EUR80 a year, in payments of EUR40 every six months. When the bond matures, investors receive the full face value of the bond, that is EUR1,000.
But some sellers and buyers of bonds prefer having an interest rate that is adjustable, and more closely tracks prevailing market rates. The interest rate on a floating-rate bond is reset periodically in line with changes in a base interest-rate index.
Some bonds have no periodic interest payments. Instead, the investor receives one payment – at maturity – that is equal to the face value of the bond plus the total accrued interest, compounded semi-annually at the original interest rate. Known as zero-coupon bonds, they are sold at a substantial discount from their face amount. For example, a bond with a face amount of EUR20,000 maturing in 20 years might be purchased for about EUR5,050. At the end of the 20 years, the investor will receive EUR20,000. The difference between EUR20,000 and EUR5,050 represents the interest, based on an interest rate of 7%, which compounds automatically until the bond matures.