Zero Coupon Bond Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Zero Coupon Bond, written in plain English, along with examples of how it is used.

What is Zero Coupon Bond?

A bond that is purchased at a discount and does not issue interest payments. [Zero coupon bonds]( are redeemed at its face value on its maturity date.

History and Meaning of Zero Coupon Bond

A zero coupon bond, also known as a discount bond, is a type of bond that is issued at a discount from its face value (or par value). Unlike traditional bonds that pay periodic interest payments to bondholders, zero coupon bonds do not make regular interest payments. Instead, investors purchase the bond at a discounted price and receive the full face value of the bond when it reaches maturity.

Zero coupon bonds were first introduced in the 1960s as a way for companies and governments to raise funds without having to make periodic interest payments. They quickly gained popularity because they offer a way for investors to earn a return on their investment without having to worry about reinvesting interest payments.

Examples of Zero Coupon Bond

  1. John buys a zero coupon bond for $800 with a face value of $1,000. When the bond reaches maturity in 10 years, John will receive the full $1,000.

  2. Sarah purchases a zero coupon bond for $500 with a maturity date of 5 years from now. She holds the bond until maturity and receives $1,000, which is the bond's face value.

  3. The government issues a zero coupon bond with a face value of $10,000 and a maturity date of 20 years. Investors can purchase the bond for $5,000 and receive the full $10,000 when the bond reaches maturity.

Legal Terms Similar to Zero Coupon Bond

  1. Bond: A financial instrument used by companies and governments to borrow money from investors. Bonds typically pay interest to bondholders and have a maturity date at which point the principal must be repaid.

  2. Discount bond: A bond that is purchased at a price lower than its face value. This type of bond may or may not pay interest to bondholders.

  3. Maturity date: The date on which a bond or other financial instrument becomes due and the principal must be repaid.