|
A Zero coupon bond (also called a discount bond
or deep discount bond) is a bond bought at a price lower than its face
value, with the face value repaid at the time of maturity. It does not make
periodic interest payments, or so-called "coupons," hence the term
zero-coupon bond. Investors earn interest via the difference between the
discounted price of the bond and its par (or redemption) value. Examples of
zero-coupon bonds include U.S. Treasury bills, U.S. savings bonds, and
long-term zero-coupon bonds.
In contrast, an investor who has a regular bond receives income from coupon
payments, which are usually made semi-annually. The investor also receives
the principal or face value of the investment when the bond matures.
Some zero coupon bonds are inflation indexed, so the amount of money that
will be paid to the bond holder is calculated to have a set amount of
purchasing power rather than a set amount of money, but the majority of zero
coupon bonds pay a set amount of money known as the face value of the bond.
Zero coupon bonds may be long or short term investments. Long-term zero
coupon maturity dates typically start at ten to fifteen years. The bonds can
be held until maturity or sold on secondary bond markets. Short-term zero
coupon bonds generally have maturities of less than one year and are called
bills. The U.S. Treasury bill market is the most active and liquid debt
market in the world.
.
|
 |
|
