Define: Zero Coupon Bonds

Business, Legal & Accounting Glossary

Definition: Zero Coupon Bonds


Quick Summary of Zero Coupon Bonds


A discounted bond that is traded and pays no coupon interest during its life. Instead, both the Principal and the Interest are paid at the maturity date.



What is the dictionary definition of Zero Coupon Bonds?

Dictionary Definition


A Zero-coupon bond is a bond issued at a discount to mature at its face value; the discount is set so that no interest is paid within the life of the bond.

In essence, it is a type of bond that offers no-interest payments.

In effect, the interest is paid at maturity in the redemption value of the bond.

A bond that (1) pays no interest but is sold subpar, (2) interest-paying bond stripped of its coupon.

Also known as a non-interest bearing bond, zero-interest bond, zero-rated bond.


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Full Definition of Zero Coupon Bonds


A bond without a stated interest rate.

Because no interest is paid, the bond will sell for a discount from its maturity value.

Rather than receiving interest, an investor’s compensation will be the difference between the discounted price at which the bond was purchased and the price the investor receives when selling the bond. As such, the difference between the par value and discount value generates profit.

  • For example: A zero-coupon bond with a face value of £1,000 and one year to maturity may sell £909. The return to the investor is determined by the discount.
  • For example: £909 invested in the bonded is rewarded with the face value of £1,000 a year later, which is an annual return of 10%.

If the investor holds the bond to maturity, the investor will earn the difference between it’s discounted cost and it’s maturity value.

One advantage of issuing a zero-coupon bond is that the issuer does not need to make periodic interest payments to its bondholders. Investors sometimes prefer zero-coupon bonds as they may allow for more favourable tax treatment. One possible disadvantage to bond investors is that zero-coupon bond prices are more volatile on the secondary bond market since the lack of periodic interest payments is viewed as risky. A zero-coupon bond is also known as an accrual bond.

A U.S. Series EE savings bond is a form of a zero-coupon bond.

A zero-coupon bond is the ultimate form of deep-discount bond.


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Examples of Zero Coupon Bonds in a sentence


Zero coupon bonds are sold at, significant discounts from par but pay no current interest.

It is, in a sense, a perpetual zero-coupon bond. A bond without a stated interest rate.

Gold generates no income. It is, in a sense, a perpetual zero-coupon bond – except it has no fixed maturity period.

There are 2 methods for deduction of the zero-coupon bond yield curve: the direct method and the indirect method.


Synonyms For Zero Coupon Bonds


zero coupon, zero-coupon, zero bonds


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Zero Coupon Bonds. PayrollHeaven.com. Retrieved April 09, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/zero-coupon-bonds/

Definition Sources


Definitions for Zero Coupon Bonds are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th February, 2020