zero coupon security
Noun: A zero coupon security is a type of debt investment that does not pay periodic interest (coupon) payments. Instead, it is issued and sold at a significant discount to its face value (par value). The investor's return is realized when the security matures and is redeemed for its full face value. The difference between the purchase price and the redemption value represents the accumulated interest earned over the life of the security.
This term is used in finance and investment contexts to describe a specific class of fixed-income securities. - Investors seeking to lock in a known future value often purchase a zero coupon security. - The portfolio includes several long-term zero coupon securities to match future liabilities.
- "Zero coupon security" in portfolio management: These securities are used for immunization strategies and for targeting specific future cash flow needs due to their absence of reinvestment risk from interim coupon payments.
- Pension funds use zero coupon securities to precisely fund obligations due in 20 years.
- Zero-coupon bond (n): The most common type of zero coupon security, often used interchangeably in general contexts.
- A Treasury STRIPS is a well-known zero-coupon bond.
- Strip (n, finance): A zero-coupon security created by separating (stripping) the coupon payments from the principal of a coupon bond.
- Discount security (n): A broader category that includes any security sold for less than its face value, encompassing zero coupon securities.
- Accrual bond: A synonym emphasizing that interest accrues over the security's life.
- Pure discount bond: A synonym highlighting the deep discount purchase price.
- Zero coupon yield curve: A yield curve constructed using the rates of zero coupon securities across different maturities.
- Analysts use the zero coupon yield curve to value other fixed-income instruments.
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a security that makes no interest payments but instead is sold at a deep discount from its face value
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