What is a 'ZeroCoupon Bond'
A zerocoupon bond, also known as an "accrual 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.
Some zerocoupon bonds are issued as such, while others are bonds that have been stripped of their coupons by a financial institution and then repackaged as zerocoupon bonds. Because they offer the entire payment at maturity, zerocoupon bonds tend to fluctuate in price much more than coupon bonds.
BREAKING DOWN 'ZeroCoupon Bond'
When a zero coupon bond matures, the investor receives one lump sum equal to the initial investment plus the imputed interest.
The maturity dates on zero coupon bonds are usually long term, with many having initial maturities of at least 10 years. These longterm maturity dates can allow an investor to plan for a longrange goal, such as paying for a childâ€™s college education. With the bond's deep discount, an investor can put up a small amount of money that can grow over many years.
Investors can choose zero coupon bonds that are issued from a variety of sources, including the U.S. Treasury, state/local government entities, and corporations.
Example
Most bonds provide semiannual interest payments, while zero coupon bonds do not pay cash coupons. Rather, the investor receives one payment at maturity which is equal to the principal invested plus the interest earned, compounded semiannually, at a stated yield. Zero coupon bonds credit investors with regular interest although the cash coupon is not paid until maturity.
Zero coupon bonds are sold at a substantial discount from the face amount. For example, a bond with a face amount of $20,000 maturing in 20 years with a 5.5% yield may be purchased for roughly $6,757. At the end of the 20 years, the investor will receive $20,000. The difference between $20,000 and $6,757 represents the interest that compounds automatically until the bond matures,
Other Factors
Prices fluctuate more than with other types of bonds in the secondary market because zero coupon bonds pay no interest until maturity. In addition, although no coupon payments are made on zero coupon bonds until maturity, investors may still have to pay federal, state and local income taxes on the imputed or phantom interest that accrues each year. Purchasing a municipal zero coupon bond, buying zero coupon bonds in a taxexempt account, or purchasing a corporate zero coupon bond that have taxexempt status may be one way to avoid paying income taxes.

Coupon Rate
The yield paid by a fixed income security. A fixed income security's ... 
Coupon Bond
A debt obligation with coupons attached that represent semiannual ... 
Current Coupon Bond
A bond with a coupon rate that is within 0.5\% of the current ... 
Bond
A debt investment in which an investor loans money to an entity ... 
Coupon Stripping
The separation of a bond's periodic interest payments from its ... 
Bunny Bond
A type of bond that offers investors the option to reinvest coupon ...

Investing
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Financial Advisor
Using Excel PV Function to compute Bonds PV
To determine the value of a bond today  for a fixed principal (par value) to be repaid in the future at any predetermined time  we can use an Excel spreadsheet. 
Investing
How Does A Bondâ€™s Coupon Interest Rate Affect Its Price?
All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays. 
Investing
How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?
Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity. 
Investing
Explaining the Coupon Rate
Coupon rate is the stated interest rate on a fixed income security. 
Investing
What is a "Coupon"?
In the financial world, â€ścouponâ€ť represents the interest rate on a bond. 
Investing
Understanding Bond Prices and Yields
Understanding this relationship can help an investor in any market. 
Financial Advisor
Simple Math for FixedCoupon Corporate Bonds
A guide to help to understand the simple math behind fixedcoupon corporate bonds. 
Investing
If I Buy A $1,000 10Year Bond With A 10% Coupon, Will I Receive $100 Each Year?
Investors can count on a fixedincome security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesnâ€™t default. 
Investing
What is a Premium Bond?
A premium bond is one that trades above its face or nominal amount.

How do debit spreads impact the trading of options?
Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >> 
How do I calculate yield to maturity of a zero coupon bond?
Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than ... Read Answer >> 
Why do zero coupon bonds tend to be volatile?
Learn why the price of zero coupon bonds is volatile and why some investors may wish to hold them in retirement accounts ... Read Answer >> 
What is the difference between yield to maturity and the coupon rate?
Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >> 
How does a bond's coupon rate affect its price?
Find out how a bond's coupon rate influences its price, including the role of governmentdictated interest rates and the ... Read Answer >> 
How does a bond's coupon interest rate affect its price?
Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>