Zero-coupon Bond (Noun)
Meaning
A bond that is issued at a deep discount from its value at maturity and pays no interest during the life of the bond; the commonest form of zero-coupon security.
Classification
Nouns denoting possession and transfer of possession.
Examples
- Investors who purchase zero-coupon bonds essentially lend money to the issuer at a discount, with the understanding that the face value will be repaid at maturity.
- Municipalities and corporations often issue zero-coupon bonds as a way to raise capital without incurring annual interest expenses.
- Zero-coupon bonds offer an investor the opportunity to earn a known return, assuming the bond is held to maturity, since there are no periodic interest payments to factor in.
- One major disadvantage of zero-coupon bonds is that the buyer has to pay tax on the accrued interest annually, even though they don't receive any cash interest until the bond matures.
- Unlike traditional bonds that make regular interest payments, zero-coupon bonds accumulate interest that is only paid at maturity, resulting in a lump sum that can be significant if the term is long.