Finance Dictionary
Zero-Coupon Bond
Definition
A bond that is issued at a deep discount to its face value but pays no interest.
Deep Dive
A zero-coupon bond is a debt instrument that does not pay interest periodically over its life. Instead, it is sold at a significant discount to its face (par) value, and the investor receives the full face value when the bond matures. The investor's return comes entirely from the difference between the discounted purchase price and the higher face value received at maturity, effectively deferring all interest payment until the end of the bond's term.
Examples & Use Cases
- 1A U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal Securities) bought for a child's college fund, maturing in 15 years
- 2A corporate zero-coupon bond issued to finance a company's long-term infrastructure project
- 3Savings bonds like Series EE bonds, which are purchased at a discount and accrue interest until maturity.
Related Terms
BondDiscountFace ValueMaturity