Zero-Coupon Bonds

From Financial Literacy Wiki

Zero-Coupon Bonds are bonds which do not pay "coupons". Zero coupon bonds are purchased at a discount from their value at maturity. The holder of a zero coupon bond is entitled to receive a single payment, usually of a specified sum of money at a specified time in the future. 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 fixed amount of purchasing power rather than a fixed amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond.

In contrast, an investor who has a regular bond receives income from coupon payments, which are usually paid twice per year. The investor also receives the principal or face value of the investment when the bond matures.

Zero coupon bond 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 bond 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.