Zero-Coupon Bond

A zero-coupon bond is a type of debt security that does not pay any periodic interest, or coupon, to its holders over the life of the bond. Instead, it is issued at a significant discount to its face value, and at maturity, the bondholder receives the full face value of the bond. The return to the investor is the difference between the bond’s deeply discounted purchase price and its face value at maturity, which effectively serves as the interest earned over the life of the bond. Because no interest is paid until maturity, zero-coupon bonds are usually more volatile in price than traditional bonds and are more sensitive to changes in interest rates. Examples of zero-coupon bonds include certain U.S. Treasury securities, corporate bonds, and municipal bonds, and these instruments are often used by investors seeking a predictable lump-sum payment at a specific future date.