Zero Coupon Bond - Definition, What is Zero Coupon Bond, Advantages of Zero Coupon Bond, and Latest News - ClearTax (2024)

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Zero Coupon Bond - Definition, What is Zero Coupon Bond, Advantages of Zero Coupon Bond, and Latest News - ClearTax? ›

What is Zero Coupon Bond. This is an accrual bond that does not pay the interest but trades at a major discount, giving a profit at maturity when the bond is taken out for its total face value.

Importance of Zero Coupon Bond

The absence of a regular income under the Zero Coupon Bond funds makes it unappealing to many investors. Contrarily, others find it suitable for meeting long-term investment objectives. It allows investors to earn risk-free interest over a long period of time.

Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount the investor will receive when the bond "matures" or comes due.

What is a zero coupon bond? A bond that pays no coupons. It only pays the face value on the maturity date.

The difference between a regular bond and a zero-coupon bond is the payment of interest, otherwise known as coupons. A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such interest payments.

Zero-coupon U.S. Treasury bonds have a poor risk-return profile when held alone. Long-dated zero-coupon Treasury bonds are more volatile than the stock market, but they offer the lower long-run returns of U.S. Treasuries. Even worse, there is no guarantee that they will go up when stocks do poorly.

After 20 years, the issuer of the bond pays you $10,000. For this reason, zero coupon bonds are often purchased to meet a future expense such as college costs or an anticipated expenditure in retirement. Federal agencies, municipalities, financial institutions and corporations issue zero coupon bonds.

A zero-coupon bond is a bond that pays no interest and trades at a discount to its face value. It is also called a pure discount bond or deep discount bond. U.S. Treasury bills are an example of a zero-coupon bond.

The interest earned on a zero-coupon bond is an imputed interest, meaning that it is an estimated interest rate for the bond and not an established interest rate. For example, a bond with a face amount of $20,000, that matures in 20 years, with a 5.5% yield, may be purchased for roughly $6,855.

The zero-coupon bond definition is a financial instrument that does not pay interest or payments at regular frequencies (e.g. 5% of face value yearly until maturity). Rather, zero-coupon bonds offer a one-time payment at maturity in the form of one face value.

Which of the following best describes a zero-coupon bond? ›

Answer and Explanation: The correct answer is option d. A bond that has no coupons and pays a face value at maturity.

A zero coupon bond is desirable because it eliminates both interest-rate risk and re-investment rate risk. Unlike regular bonds which pay semi-annual interest, zero coupon bonds do not pay any interest during their term.

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 have so-called "coupons," hence the term zero-coupon bond.

Zero coupon bonds are fixed income securities that don't pay any interest. At the time of maturity, the investor is paid the face value or par value. These bonds come with 10-15 years maturity. Hence, they trade at a deep discount.

Zero-Coupon bonds do not let any periodic coupon payments, and hence a fixed interest on Zero Coupon bonds is guaranteed. Fixed returns: The Zero Coupon bond is a perfect choice for those who prefer long-term investment and earn a lump sum.

To calculate the yield-to-maturity (YTM) on a zero-coupon bond, first divide the face value (FV) of the bond by the present value (PV). The result is then raised to the power of one divided by the number of compounding periods.

Since these bonds do not make periodic interest payments, they offer certain benefits to the issuing corporation. Firstly, deferring payment obligations allows the issuer to use the funds for business growth or other purposes until the bond's maturity date, without the need for interim interest payments.

One of the biggest risks of zero-coupon bonds is the default risk. With this type of bond, you have to wait until it reaches maturity to recoup any of your investment. So if the company defaults (or can't pay back its financial obligations), you may not get all or some of your money back.

fixed Interest rate: Coupon bonds offer the advantage of having a fixed interest rate throughout their tenure. This means that regardless of market conditions or changes in prevailing interest rates, the bondholder will continue to receive the same predetermined interest payments until maturity.

High Returns: Zero coupon bonds typically offer higher returns than other bond types due to the lack of interest payments. The longer the maturity date, the higher the potential return, making them an attractive option for investors looking for long-term investments.