How is the interest compensated in the case of zero coupon rate debentures?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- By issuing them at a substantial discount.
In the case of zero coupon rate debentures, the interest is compensated by issuing them at a substantial discount to their nominal or face value.
Zero Coupon Rate Debentures do not carry a specific rate of interest. In order to compensate the investors, such debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures.