Zero coupon bonds are a type of fixed-income security.
They allow investors to earn interest through the growth of their par value over time, instead of receiving interest payments on a periodic basis.
The term zero coupon bond refers to the fact that these bonds are sold at a deep discount from their face value with all accrued interest due to be paid on the maturity date.
A zero-coupon bond is a fixed-income instrument that doesnt pay coupons or interest.
What is a coupon?
A coupon is the annual interest payment due to a bondholder.
Coupon payments are usually made at regular intervals, such as monthly or quarterly.
The issuer of the bond (which could be a government, corporation, or municipality) makes these payments out of its own funds.
Zero-coupon bonds are also called zeros, accrual bonds, and pure discount bonds.
The holders of Zero Coupon Bonds receive only one single payment at maturity.
Benefits of Zero-coupon bond
The benefits of investing in zero-coupon bonds include low cost of ownership, long-term growth potential and tax advantages for some investors.
However, before you take the plunge into zero-coupon bonds, it is important to be aware of this drawback.
For example, if interest rates rise substantially (or fall), your principal will not grow as much as it would with traditional coupon bonds because there are no interest payments.
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