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. Bull CD

    A certificate of deposit whose interest rate fluctuates in direct ...
  2. Bear CD

    A certificate of deposit whose interest rate fluctuates in inverse ...
  3. Callable Certificate Of Deposit

    An FDIC insured certificate of deposit (CD) that contains a call ...
  4. Uninsured Certificate Of Deposit

    A certificate of deposit (CD) which is not insured against losses. ...
  5. Indexed Certificate Of Deposit ...

    A savings certificate entitling the bearer to receive an interest ...
  6. Automatic Rollover

    1. The transfer of qualified retirement plan distributions into ...
Related Articles
  1. Investing

    How To Earn The Most From CDs When Interest Rates Are Low

    Certificates of deposit might not seem like a good place to keep your money when interest rates are low, but they do offer security and stability. And with laddering and studying promotional ...
  2. Managing Wealth

    What Is A CD Ladder?

    Find out how a CD ladder can protect you from interest rate risk.
  3. Investing

    Getting Certificates of Deposit (CDs) in Emerging Markets: Risks and Rewards

    Learn about the risks and rewards associated with investing in a certificate of deposit (CD) offered by an emerging market and what to consider before buying.
  4. Investing

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
  5. Investing

    Low Interest Rates: Where You Should And Shouldn't Invest

    Learn how low interest rates affect stock prices and how you should invest in low-rate times.
  6. Investing

    CDs Vs. Inflation: Are They Keeping Up?

    Learn how to determine whether the money invested in certificates of deposit (CDs) can keep pace with the rate of inflation and how you measure inflation.
  7. Investing

    Money market investments or CDs: Which are better?

    Find out which short-term savings vehicle, a money market account or a certificate of deposit (CD), is a better investment for your needs.
RELATED FAQS
  1. How are yields taxed on a certificate of deposit (CD)?

    Learn how interest earned on a certificate of deposit is taxed and how this may reduce the total return of an investment ... Read Answer >>
Hot Definitions
  1. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  5. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  6. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
Trading Center