zero-coupon security
Definition
Noun: A zero-coupon security is a type of debt security that does not make periodic interest payments (coupons). Instead, it is issued and sold at a price significantly below its stated face value (par value). The investor's return is realized when the security matures and is redeemed for its full face value.
Usage
This term is used in finance and investment contexts to describe a specific class of fixed-income instruments. It is a compound noun where "zero-coupon" functions as an adjective modifying "security."
Examples
- The pension fund invested in long-term zero-coupon securities to match its future liabilities.
- Because it pays no interest until maturity, a zero-coupon security is highly sensitive to changes in market interest rates.
- Investors can purchase a zero-coupon security for $750 today and receive $1,000 in ten years.
Advanced Usage
- "Stripped" Securities: Many zero-coupon securities are created through a process called "stripping," where the coupon payments of a regular bond are separated (stripped) from the principal repayment. The principal portion becomes a zero-coupon security.
- Example: The Treasury STRIPS program allows investors to buy the principal payment of a bond as a standalone zero-coupon security.
Variants and Related Words
- Zero-Coupon Bond (ZCB): The most common type of zero-coupon security. The terms are often used interchangeably.
- Discount Security: A broader category that includes any security sold below its face value, which encompasses zero-coupon securities.
- Accretion: The process by which the discounted purchase price of a zero-coupon security gradually increases (accretes) on the books to reach its face value at maturity.
Synonyms
- Discount Bond (specifically when referring to bonds)
- Pure Discount Security
Related Concepts (Not Synonyms)
- Coupon Bond: The direct antonym; a bond that makes regular interest payments.
- Face Value / Par Value: The nominal value of the security paid at maturity.
- Yield to Maturity (YTM): The total return anticipated on a zero-coupon security if held until it matures.
Noun
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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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