Zero-Coupon Bond

A zero coupon bond is a bond that does not pay interest but instead is sold at a discount, i.e., for less than its face value. For example, a zero-coupon bond with a face value of ZWL$5,000 may sell for only ZWL$4,200. When the zero-coupon bond matures years later, the bond buyer receives the full ZWL$5,000; the ZWL$800 difference is the ‘interest’ earned on the zero-coupon bond. One advantage of issuing a zero-coupon bond is that the issuer does not need to make periodic interest payments to its bond holders. One possible disadvantage to bond investors is that zero-coupon bond prices are more volatile on the secondary bond market since the lack of periodic interest payments is viewed as risky. A zero-coupon bond is also known as an accrual bond.

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