Zero-Coupon Certificate Of Deposit (CD)

AAA

DEFINITION of 'Zero-Coupon Certificate Of Deposit (CD)'

A certificate of deposit (CD) that is purchased at a largely discounted rate. It differs from a traditional CD in that interest payments are not received yearly, but rather as a lump sum at the date of maturity.

INVESTOPEDIA EXPLAINS 'Zero-Coupon Certificate Of Deposit (CD)'

The advantage of a zero-coupon CD is that there is no reinvestment risk, unlike with an instrument that pays interest at regular intervals. The disadvantage to investors is that even though interest is not paid annually, it is deemed to have accrued annually and is treated as the investor's taxable income, which means that tax is payable every year on the accrued interest for the term of the CD.


While the interest is not received until the maturity date of the CD, taxes must be paid on the interest every year up until the interest is actually received. Even though the price of the CD is discounted to far below par to entice purchase, strong emphasis must be placed on ensuring that the buyer will have enough money to pay the large tax bill each year.

RELATED TERMS
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
  2. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Par

    1. The face value of a bond. Generally $1,000 for corporate issues, ...
  5. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  6. Surrender Period

    The amount of time an investor must wait until he or she can ...
Related Articles
  1. Bonds & Fixed Income

    Certificates Of Deposit

  2. Investing Basics

    Callable CDs: Check The Fine Print

  3. Insurance

    How To Create A Laddered CD Portfolio

  4. Insurance

    Are CDs Good Protection For The Bear ...

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center