Zero-coupon bonds

Definition

Zero-coupon bonds are debt securities that do not pay periodic interest. Instead, they are issued at a discount to their face value and mature at par value, with the difference representing the accrued interest.

5 Must Know Facts For Your Next Test

1. Zero-coupon bonds are sold at a deep discount from their face value.
2. They accumulate interest over time and pay the full face value upon maturity.
3. The difference between the purchase price and the maturity value represents the bond's return.
4. Zero-coupon bonds tend to be more volatile than coupon-bearing bonds due to their sensitivity to interest rate changes.
5. They can be issued by corporations, municipalities, and federal governments.

Review Questions

• What distinguishes zero-coupon bonds from regular coupon-bearing bonds?
• How is the return on a zero-coupon bond calculated?
• Why might zero-coupon bonds be considered more volatile compared to other types of bonds?

Related terms

Coupon Bond: A bond that pays periodic interest payments called coupons until maturity, when the face value is also repaid.

Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures.

Discount Bond: A bond sold for less than its par or face value.