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What is a zero coupon bond?
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A zero coupon bond is a type of bond that does not pay periodic interest. Instead, it is issued at a discount and pays its full face value at maturity.
A zero coupon bond generates returns through the difference between purchase price and face value.
Investors buy zero coupon bonds below their nominal value, for example at $800, and receive the full $1,000 at maturity. The difference represents the return. Because there are no interim interest payments, the entire return is realized at the end of the bond’s term. These bonds are more sensitive to interest rate changes than regular bonds and are often used for long term financial planning, such as saving for a future obligation.
Short example:
Suppose an investor buys a zero coupon bond for $800 with a face value of $1,000 and a maturity of 5 years.
After 5 years, the investor receives $1,000.
The $200 difference represents the total return on the investment.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.
