Zero-Coupon Bond
A Zero coupon bond (also known as a discount bond) is a bond bought at a
price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic
interest payments, or so-called "coupons," hence the term zero-coupon bond. Investors earn interest via the
difference between the discounted price of the bond and its par (or redemption) value. Examples of zero-coupon
bonds include U.S. Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds.In contrast, an investor
who has a regular bond receives income from coupon payments, which are usually made semi-annually.
The investor also receives the principal or face value of the investment when the bond matures.
Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder
is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority
of zero coupon bonds pay a set amount of money known as the face value of the bond. Zero coupon bonds may be long
or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years.
The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have
maturities of less than one year and are called bills. The U.S. Treasury bill market is the most active and liquid
debt market in the world.
|
