non-interest-bearing note

Definition

A bond which pays no coupons, is sold at a deep discount to its face value, and matures at its face value. A non-interest-bearing note has the important advantage of being free of reinvestment risk, though the downside is that there is no opportunity to enjoy the effects of a rise in market interest rates. Also, such bonds tend to be very sensitive to changes in interest rates, since there are no coupon payments to reduce the impact of interest rate changes. In addition, markets for non-interest-bearing notes are relatively illiquid. Under U.S. tax law, the imputed interest on a non-interest-bearing note is taxable as it accrues, even though there is no cash flow. also called zero-coupon bond.

Use this term in a sentence

Non-interest-bearing notes are good bonds for those who are risk averse because they are relatively low investment risk.

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non-interest-bearing account non-investment grade