Glossary - Zero-coupon Bond
A zero-coupon bond is a debt security that does not pay interest (a coupon) during its life but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. This type of bond typically involves a longer-term investment, and the discount at which it is purchased effectively represents the interest earned by the investor.
Also known as
- Zeroes
- Deep Discount Bonds
Use cases examples
- Corporate Bond Agreement: The Company hereby issues a Zero-Coupon Bond due 2030, to be redeemed at its face value of $10,000 at maturity, without periodic interest payments.
- Government Securities Offering Memorandum: This Zero-Coupon Treasury Bond, while bearing no annual interest, is offered at a discounted rate of 65% of its face value, compounding annually till its maturity in 2045.
Considerations for investors
- Assessing the creditworthiness of the issuer, as the return on investment relies entirely on the entity’s ability to repay at maturity.
- Considering the impact of inflation on the future value of the zero-coupon bond, since the lack of periodic interest payments removes a layer of protection against inflation.
Considerations for founders
- Understanding the tax implications of issuing zero-coupon bonds, as implied interest can be taxable.
- Evaluating the company's long-term financial strategy, as zero-coupon bonds delay the influx of capital to maturity.
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