Zero-Coupon Bond

AAA

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."

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Coupon Stripping

    The separation of a bond's periodic interest payments from its ...
  2. Ex Coupon

    A bond or preferred stock that does not include the interest ...
  3. Zero-Coupon Mortgage

    A form of commercial financing in which regular interest and ...
  4. Pure Discount Instrument

    A type of security that pays no income until maturity; upon expiration, ...
  5. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  6. Zero-Coupon Convertible

    A fixed income instrument that is a combination of a zero-coupon ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...

    In capital budgeting, projects are often evaluated by comparing the internal rate of return, or IRR, on a project to the ... Read Full Answer >>
  4. What is the rationale behind the effective interest rate?

    There are several different effective interest rates. In accounting, the effective interest method examines the relationship ... Read Full Answer >>
  5. What is the difference between compounding interest and simple interest?

    Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money. The interest ... Read Full Answer >>
  6. What is the relationship between modified duration and interest rates?

    Modified duration is a formula that measures the value of a bond in relation to changes in interest rates. Modified duration ... Read Full Answer >>
Related Articles
  1. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  2. Investing Basics

    What's the Primary Market?

    The primary markets are where investors can get first crack at a new security issuance.
  3. Investing Basics

    Treasury Inflation-Protected Securities (TIPS)

    Treasury inflation-protected securities are treasury securities that make adjustments for inflation as reflected in the Consumer Price Index.
  4. Investing Basics

    What is the Coupon?

    In the financial world, “coupon” represents the interest rate on a bond.
  5. Investing Basics

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  6. Retirement

    Facing Retirement? Look Beyond 100% Bonds

    Retiring doesn't mean putting all your money in bonds. There are two things to consider when it comes to be invested in bonds: growth and inflation.
  7. Mutual Funds & ETFs

    Is the PowerShares (PFEM) ETF a Good Bet Now?

    What you need to know if you are considering trading PowerShares Fundamental Emerging Markets Local Debt ETF.
  8. Mutual Funds & ETFs

    Anatomy of Emerging Markets Debt ETF (EMLC)

    This emerging market bond ETF offers a high yield, but there are dangers. Find out why.
  9. Trading Strategies

    How to Pick the Best Dividend Stocks

    Dividend stocks can make you rich, but you have to be patient.
  10. Trading Strategies

    4 Quality Dividend Stocks You Need to Consider

    Looking for quality stocks that also pay dividends? Consider these four.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center