Zero-Coupon Bond

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What is a 'Zero-Coupon Bond'

A zero-coupon bond is 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. 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 Answer >>
  2. How does an investor make money on a zero coupon bond?

    Learn about investing in zero-coupon bonds, exactly how they work as an investment vehicle, and their advantages and disadvantages ... Read Answer >>
  3. Why do interest rates tend to have an inverse relationship with bond prices?

    At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer ... Read Answer >>
  4. How do I calculate the holding period return yield on a zero-coupon bond?

    Learn how to calculate the holding period return yield for a zero-coupon bond based on a formula with a relevant example ... Read Answer >>
  5. What is a stripped bond?

    The quick answer to this question is that a stripped bond is a bond that has had its main components broken up into a zero-coupon ... Read Answer >>
  6. What is the formula for calculating the capital to risk weight assets ratio for a ...

    Learn about the Macaulay duration and zero-coupon bonds, the formula used for the calculation and how to calculate the Macaulay ... Read Answer >>
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