Zero coupon Bond

Written by Fmi.Online Friday November 5, 2021
A Zero Coupon Bond is a debt security that is sold at a discount and does not pay any interest payments to the bondholder. In other words, it’s a bond that sells for less than its face value and does not make coupon payments or periodic interest payments during its life. At maturity, it can then be redeemed at its face value allowing the bond holder to make a profit.

Explanation :

Companies, schools, and governments use bonds as a way to finance expansions and other long term projects. Usually the decision to issue a bond starts with a proposal for new projects. When the board or governing body approves the plans, a bond can be issued. Unfortunately, it isn’t that easy. Sometimes it can take a few months for the bond to be drafted and actually issued to the public. This presents a problem. The interest rate and terms of the bond are set when the bond is initially drafted up. By the time the bond actually hits the public, interest rates have usually changed. That is why most bonds are either issued at either a premium or a discount. Since the stated interest rate of the bond can’t be changed at this point, the sales price of the bond is changed. A bond issued at a premium sells for more than the stated value. In other words, a $1,000 bond might sell for $1,100. A discounted bond is the opposite. The sale price is actually reduced lower than the stated price. A $1,000 bond might only sell for $900.In an effort to get away from this problem, some companies don’t issue bonds with stated interest rates or zero-coupon bonds.

In a nutshell :

  • A zero-coupon bond is a debt security instrument that does not pay interest.
  • Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity.
  • The difference between the purchase price of a zero-coupon bond and the par value indicates the investor's return.
Our Courses are designed to boost your career

Launch your career with Fmi’s Learning Pathway

Choose a learning pathway that best meets your needs and ambitions. Not sure which Fmi learning pathway is right for you? Explore our CareerBuddy videos for help and advice.

Investment banking pathway
  • courses-clock60+ hours
  • courses-desktop9 courses

Investment banking offers many exciting career opportunities for students. From Financial Analysts to Investment Management, and Sales & Trading to a wide range of roles in infrastructure such as IT, Risk or Compliance. This pathway is designed to help you understand the investment banking industry, the roles investment banks are recruiting for, and most importantly, help you to develop the practical skills you need to get into the industry and your preferred role whether this be as part of a school leaver, intern or graduate program.

FMI Online Student join-student-img2 FMI Online Student
55,000+ students currently enrolled
Global markets pathway
  • courses-clock70+ hours
  • courses-desktop10 courses

Global markets provide a range of important products and services to corporates, institutions and governments worldwide from executing trades and managing risk to providing quality research content. A key business area in all investment banks, global markets offers a wide range of career paths for students to consider across all functions and at all levels from school leavers to internships through to graduate programs.

FMI Online Student join-student-img2 FMI Online Student
85,000+ students currently enrolled
Asset management pathway
  • courses-clock50+ hours
  • courses-desktop8 courses

The asset management industry is a global industry worth over 100 trillion US dollars. It plays a crucial role in managing the assets of retail and institutional investors, offering a wide range of exciting careers in doing so. If you’re looking to forge a career in asset management, our Asset management pathway is perfect for you. We help you build the skills all asset managers are looking for and explore everything you need to know about the industry and the wide range of roles available in the sector

FMI Online Student join-student-img2 FMI Online Student
100,000+ students currently enrolled