Zero-Coupon Bond: How a Bond With No Interest Payments Works
By Imperialpedia Staff
A zero-coupon bond pays no periodic interest at all. Instead, it's sold at a discount to its face value and redeemed at full face value at maturity — the difference between the discounted purchase price and the face value is the investor's entire return.
A Simple Example
A zero-coupon bond with a $1,000 face value maturing in 10 years might be purchased today for roughly $650, depending on prevailing interest rates. The investor receives no interest payments along the way, but collects the full $1,000 at maturity — the $350 difference represents the return, effectively compounded over the bond's life.
Why Investors Use Them
Zero-coupon bonds are useful for matching a known future expense with a known future payout — for example, planning for a specific future date like a child's college enrollment — since the maturity value is fixed and known in advance, with no reinvestment-rate uncertainty from periodic coupon payments.
IMPORTANT
Zero-coupon bonds can trigger a tax obligation on "imputed" interest each year even though no cash payment is actually received until maturity, an important planning consideration in taxable accounts.
Related Articles
Bonds
Junk Bond: High-Yield, Higher-Risk Corporate Debt Explained
By Imperialpedia Staff
PersonalFinance
Simple Interest: How It Works and How It Differs From Compounding
By Imperialpedia Staff
Bonds
Yield Curve: What Its Shape Signals About the Economy
By Imperialpedia Staff
PersonalFinance
Compound Interest: The Power of Exponential Growth
By Imperialpedia Staff
PersonalFinance
Estate Tax: Understanding Federal and State Tax Implications
By Imperialpedia Staff
Bonds
Treasury Bond: The Government Debt Behind the Yield Curve
By Imperialpedia Staff
Markets
Bear Market: Definition, Causes, and How to Navigate One
By Imperialpedia Staff
PersonalFinance
Fiduciary: What the Legal Duty Actually Means for Investors
By Imperialpedia Staff
PersonalFinance
Opportunity Cost: The Hidden Price of Every Financial Choice
By Imperialpedia Staff
Economy
Quantitative Easing: How Central Banks Stimulate the Economy
By Imperialpedia Staff
PersonalFinance
A-B Trust: Definition, How It Works, and Tax Benefits
By Imperialpedia Staff
PersonalFinance
Net Worth: How to Calculate Your Real Financial Scorecard
By Imperialpedia Staff
Economy
Gross Domestic Product (GDP): What It Measures and Why It Matters
By Imperialpedia Staff
Crypto
0x Protocol: A Decentralized Exchange Infrastructure for Ethereum
By Imperialpedia Staff
Economy
Marital Deduction: Unlimited Tax-Free Transfers Between Spouses
By Imperialpedia Staff
Markets
Volatility: What It Measures and Why It Isn't the Same as Risk
By Imperialpedia Staff