A zero-coupon bond is a type of bond<\/a> that does not pay periodic interest (coupon payments) to the bondholder. Instead, it is sold at a discount to its face value, and the investor receives the face value of the bond when it matures.<\/p>\n Here are some key points about zero-coupon bonds:<\/p>\n 1. No periodic interest payments<\/strong>: 2. Discounted purchase price<\/strong>: 3. Face value at maturity<\/strong>: 4. Fixed maturity date<\/strong>: 5. Implied yield<\/strong>: 6. Less price volatility<\/strong>: 7. Tax considerations<\/strong>: 8. Uses for investors<\/strong>: 9. Types of issuers<\/strong>: 10. Risk considerations<\/strong>:What are zero-coupon bonds?<\/h3>\n
\n– Unlike traditional bonds, zero-coupon bonds do not make regular interest payments to the bondholder. Instead, they are issued at a discount and pay out a lump sum at maturity.<\/p>\n
\n– Investors purchase zero-coupon bonds at a price below their face value. The discount represents the interest that would have been paid over the life of a traditional bond.<\/p>\n
\n– When the bond reaches its maturity date, the issuer pays the bondholder the full face value, which is the amount the bond was originally intended to be worth.<\/p>\n
\n– Zero-coupon bonds have a fixed maturity date, at which point the bondholder receives the face value. The time to maturity is typically long-term, ranging from several years to several decades.<\/p>\n
\n– The yield on a zero-coupon bond is implied by the difference between its purchase price and face value. This implied yield is the effective interest rate the investor earns over the life of the bond.<\/p>\n
\n– Zero-coupon bonds tend to have less price volatility compared to traditional bonds because they do not make coupon payments, which can be affected by changes in market interest rates<\/a>.<\/p>\n
\n– Even though zero-coupon bonds do not make regular interest payments, investors may have to pay taxes on the imputed interest that accrues each year. This is known as “phantom income.”<\/p>\n
\n– Zero-coupon bonds are often used for specific financial goals, such as funding a child’s education or planning for retirement. Because they provide a known future value, they can be a useful tool for long-term financial planning.<\/p>\n
\n– Zero-coupon bonds can be issued by governments (treasury STRIPS) or corporations. They may also be created through financial institutions that “strip” the coupon payments from a regular bond to create zero-coupon bonds.<\/p>\n
\n– While zero-coupon bonds offer a fixed return at maturity, there is some risk associated with holding them, particularly if the issuer defaults. Investors should assess the creditworthiness of the issuer before investing.<\/p>\n