A zero-coupon Bond is a type of Bond that doesn’t pay periodic interest. Instead, it is sold at a significant discount and matures at face value. The investor’s return is the difference between the purchase price and the Bond’s maturity value. These Bonds are appealing to long-term investors seeking a fixed, predictable return at a specific future date. They are often used for planning large future expenses like education or retirement. However, zero-coupon Bonds are more sensitive to interest rate changes and may offer lower liquidity, making them less suitable for short-term trading strategies.
Example:
An investor purchases a discounted Bond that pays full value at maturity.
