Zero-Coupon Bond

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DEFINITION of 'Zero-Coupon Bond'

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Also known as an "accrual bond."

BREAKING DOWN 'Zero-Coupon Bond'

Some zero-coupon bonds are issued as such, while others are bonds that have been stripped of their coupons by a financial institution and then repackaged as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more than coupon bonds.

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RELATED FAQS
  1. How do I calculate the holding period return yield on a zero-coupon bond?

    In finance, the holding period return yield is the total return from an asset over time that takes into account any income ... Read Full Answer >>
  2. What are the different types of college savings accounts?

    The resulting Macaulay duration of a zero-coupon bond is equal to the time to maturity of the bond. A zero-coupon bond is ... Read Full Answer >>
  3. What is the formula for calculating the capital to risk weight assets ratio for a ...

    Use the Macaulay duration to calculate the duration of a zero-coupon bond. The resulting Macaulay duration of a zero-coupon ... Read Full Answer >>
  4. How does an investor make money on a zero coupon bond?

    An investor makes money on a zero-coupon bond by being paid interest upon maturity. Also known as a discount bond, a zero-coupon ... Read Full Answer >>
  5. Why do zero coupon bonds tend to be volatile?

    Zero coupon bonds are volatile because they do not pay any periodic interest during the life of the bond. Upon maturity, ... Read Full Answer >>
  6. Other than my savings account, what other types of holdings compound my interest?

    Investors and savers can use the power of compounding interest to accumulate wealth over time. Unlike simple interest that ... Read Full Answer >>
  7. What is the difference between a zero-coupon bond and a regular bond?

    The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest ... Read Full Answer >>
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