Zero-Coupon Bond
What Is a Zero-Coupon Bond?
A zero-coupon bond is a type of bond that does not pay periodic interest payments during its life. Instead, it is sold at a discount to its face value and pays the full face value when it matures.
The difference between the purchase price and the maturity value represents the investor’s return.
Why It Matters
Zero-coupon bonds provide predictable future payouts and are often used for long-term financial planning. Because they do not pay periodic interest, investors know exactly how much they will receive at maturity.
However, their prices can be more sensitive to interest rate changes than traditional bonds.
How Zero-Coupon Bonds Work
Investors purchase the bond at a discounted price.
Over time, the value gradually increases until the bond reaches its full face value at maturity.
These bonds are commonly issued by governments and corporations.
Example
An investor buys a zero-coupon bond for $700 that will mature at $1,000 in ten years.
Zero-Coupon Bond vs Coupon Bond
- Zero-coupon bonds do not pay periodic interest.
- Coupon bonds pay regular interest payments during the life of the bond.
FAQs About Zero-Coupon Bonds
Do zero-coupon bonds pay interest?
They do not pay periodic interest but provide a return at maturity.
Are zero-coupon bonds risky?
They are sensitive to interest rate changes.
Who issues zero-coupon bonds?
Governments and corporations may issue them.
Related Terms
