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.

BREAKING DOWN '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. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  3. Par

    1. The face value of a bond. Generally $1,000 for corporate issues, ...
  4. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  5. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
  6. Security

    A financial instrument that represents an ownership position ...
Related Articles
  1. Bonds & Fixed Income

    Certificates Of Deposit

    Safety is a hallmark of the traditional certificate of deposit (CD) sold by a bank or credit union.
  2. Investing Basics

    Callable CDs: Check The Fine Print

    These offer higher returns than regular certificates of deposit, but there's a catch.
  3. Insurance

    How To Create A Laddered CD Portfolio

    Laddered certificates of deposit offer safe capital and predictable cash flow, while bringing simplicity to your portfolio.
  4. Insurance

    Are CDs Good Protection For The Bear Market?

    Certificates of deposit promise stable income in any market, but do they deliver?
  5. Personal Finance

    Get A Short-Term Advantage In The Money Market

    This investment vehicle is often the perfect stop-gap measure for growing your money.
  6. Credit & Loans

    How Interest Rate Cuts Affect Consumers

    Traders rejoice when the Fed drops the rate, but is it good news for all? Find out here.
  7. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Hi Yld Bd

    Find out about the SPDR Barclays Short Term High Yield Bond ETF, and explore detailed analysis of the fund that tracks short-term, high-yield corporate bonds.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Corp Bd

    Learn about the SPDR Barclays Short-Term Corporate Bond ETF, and explore detailed analysis of the exchange-traded fund tracking U.S. short-term corporate bonds.
RELATED FAQS
  1. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  2. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  3. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  4. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
  5. What are the differences between debt and equity markets?

    The basic differences between the debt and equity markets include the type of financial interest they represent, the way ... Read Full Answer >>
  6. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  2. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  3. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  4. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  5. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  6. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!