Series 79: Zero Coupon Bonds

Zero Coupon Bonds

A zero coupon bond, or “zero,” is a bond that does not pay interest (and thus has a coupon of zero). While such a bond would seem to be singularly unattractive to investors, in fact the bond does effectively pay interest, but does so through appreciation rather than via periodic payments.

The way this works is the zero coupon bond is sold at a substantial discount from par value. The bond is then redeemed for par value at maturity. The difference between the purchase price and the par value constitutes the income to the investor—the interest, essentially—provided by