EXPLAIN THE LINE :-
"THE DIFFERENCE BETWEEN NOMINAL VALUE AND ISSUE PRICE IS TREATED AS THE AMOUNT OF INTEREST RELATED TO THE DURATION OF BONDS."
Dear Student, here is a general note. In such instances, where you don't get the meaning of a particular line, it would be really great if you can supply us with the context of the line. I mean the context or the background or the related topic, where you came across the line.
Anyway, let me see the extent to which I can help you in the present scenario. I think you might have read this line in relation to zero coupon bonds. Isn't it? If yes, then the following explanation will be of some help to you. Well, in case of zero coupon bonds, there is no specified rate of interest. Now, the question arises why an investor is willing to invest in such bonds, since the amount of interest that he or she expects to earn is not specified. Obviously, this is quite rational. Thus, in such cases, the bonds are offered to the investors at a much cheaper price, i.e. the bonds are issued at discount (the price that is lesser than the face-value of the bonds). For instance, suppose there is a zero coupon bond of Rs 100. Now, this bond is being offered to you at say Rs 90. So, you see this difference of Rs 10, i.e. the difference between the face value (Rs 100) and the issue price (Rs 90) is the interest amount that you will be getting (at the maturity of the bond). Thus, you will receive an interest amount of Rs 10 on the maturity of the bond.
Hope this will clear your doubt. Keep posting!!
Anyway, let me see the extent to which I can help you in the present scenario. I think you might have read this line in relation to zero coupon bonds. Isn't it? If yes, then the following explanation will be of some help to you. Well, in case of zero coupon bonds, there is no specified rate of interest. Now, the question arises why an investor is willing to invest in such bonds, since the amount of interest that he or she expects to earn is not specified. Obviously, this is quite rational. Thus, in such cases, the bonds are offered to the investors at a much cheaper price, i.e. the bonds are issued at discount (the price that is lesser than the face-value of the bonds). For instance, suppose there is a zero coupon bond of Rs 100. Now, this bond is being offered to you at say Rs 90. So, you see this difference of Rs 10, i.e. the difference between the face value (Rs 100) and the issue price (Rs 90) is the interest amount that you will be getting (at the maturity of the bond). Thus, you will receive an interest amount of Rs 10 on the maturity of the bond.
Hope this will clear your doubt. Keep posting!!