zero-coupon bond

Definition

A bond which pays no coupons, is sold at a deep discount to its face value, and matures at its face value. A zero-coupon bond 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 zero-coupon bonds are relatively illiquid. Under U.S. tax law, the imputed interest on a zero-coupon bond is taxable as it accrues, even though there is no cash flow.

Use zero-coupon bond in a sentence

The zero-coupon bond was optimal for our new project as we only cared about the final result of the project.

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John Smith's Grandparents were able to afford to purchase a $1000 zero-coupon bond for john that would mature at face value when he turned 18.

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They had very negative thoughts about the statement of the economy, so they were ok taking zero-coupon bonds. They felt the rates would not increase, so they were not taking on additional risk.

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COLTS non-interest-bearing note