Zero-Coupon Bond - Definition

A bond that pays no interest. It is sold at a discount from Par and matures at par. These are fairly Illiquid investments because they do not benefit from changes in interest rates. However, they tend to be low-Risk. Zero-coupon bonds fluctuate in price, sometimes dramatically, with changes in interest rates. Sometimes zero-coupon bonds are issued as such; other times they are bonds stripped of their coupons by a financial institution and resold as zero-coupon bonds. A zero-coupon bond is less formally known as a zero.

Zero coupon bonds have duration equal to the bond's time to Maturity, which makes them sensitive to any changes in the interest rates. Investment banks or dealers may separate coupons from the Principal of coupon bonds, which is known as the residue, so that different investors may receive the principal and each of the coupon payments. This creates a supply of new zero coupon bonds.

It is important to Note that the interest on zero coupon bonds is not paid to the bondholder incrementally. Instead, the interest is calculated on a recurring Basis. Generally, the interest is compounded on an annual or semi-annual basis, with the Rate of interest added to the no coupons account. This process continues until the zero coupon bonds reach maturity. At that point, the bondholder receives the initial purchase price of the bond, plus all the interest accrued over the life of the bond.



Terms near "Zero-Coupon Bond"

Zero-Coupon Certificate Of Deposit (CD)
Zero-Coupon Convertible
Zero-Coupon Mortgage
Zero-Floor Limit
Zero-Investment Portfolio
Zero-One Integer Programming
Zero-Rated Goods
Zero-Sum Game
Zero-Volatility Spread (Z-Spread)
Zeta Model
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