Define: Zero Coupon Bonds

UK Accounting Glossary

Definition: Zero Coupon Bonds


Quick Summary of Zero Coupon Bonds


A bond without a stated interest rate.



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 it’s 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.

 


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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 it’s 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.

  • 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.

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

Investors sometimes prefer zero-coupon bonds as they may allow for more favourable tax treatment.

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.

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.



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Definition Sources


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This glossary post was last updated: 23rd December 2018.