zero coupon bond
Noun: A zero coupon bond is a type of debt security that is sold at a price significantly lower than its face value (par value) and pays no periodic interest payments (coupons). The bondholder receives a single payment equal to the bond's full face value upon its maturity date. The profit for the investor is the difference between the purchase price and the redemption value at maturity.
This term is used in finance and investment contexts to describe a specific, common type of fixed-income security. - It functions as a countable noun (e.g., a zero coupon bond, several zero coupon bonds). - It is often contrasted with coupon bonds or traditional bonds that pay interest periodically.
- As a subject:
- As an object:
- With modifiers:
- "Stripped" or "STRIPS": U.S. Treasury bonds can be transformed into zero coupon bonds through a process called "stripping," creating securities known as Treasury STRIPS (Separate Trading of Registered Interest and Principal Securities).
- Investors can buy Treasury STRIPS, which are effectively zero coupon bonds.
- Imputed Interest: For tax purposes in some jurisdictions, the annual increase in the bond's value (the "accretion") is treated as imputed interest income, even though no cash payment is received until maturity.
- Holders of zero coupon bonds may have to pay taxes on imputed interest annually.
- Zero-coupon security (n): A broader category that includes instruments like zero coupon bonds.
- Treasury bills are a type of zero-coupon security.
- Discount bond (n): A general term for any bond sold below its par value, which includes but is not limited to zero coupon bonds.
- Accretion (n): The process of the bond's value gradually increasing from its purchase price to its face value at maturity.
- Accrual bond
- Deep discount bond (Note: While similar, not all deep discount bonds are strictly zero-coupon, as some may pay very small coupons.)
- To issue a zero coupon bond: The act of a corporation or government selling this type of bond.
- The company decided to issue a zero coupon bond to finance the new project.
- To hold a zero coupon bond to maturity: Keeping the investment until its maturity date to receive the full face value.
- The strategy is to hold the zero coupon bond to maturity.
- Time value of money: The core principle behind zero coupon bonds; a sum of money today is worth more than the same sum in the future.
- Maturity date: The specific future date on which the bond's principal is repaid.
- Face value / Par value: The amount the bondholder will receive at maturity.
- Yield to maturity (YTM): The total annual return anticipated on the bond if it is held until it matures.
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a bond that is issued at a deep discount from its value at maturity and pays no interest during the life of the bond; the commonest form of zero-coupon security
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