Zero Coupon Securities
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Zero Coupon Securities
Like bonds, zero coupon securities are debt instruments issued by the US Treasury, municipal governments, corporations, and brokerage firms.
Things To Know
- Zero coupons are issued at discounts usually far below the face value, or par.
What the "zero" means
With traditional bonds, the coupon rate is the rate of annual interest the issuer pays to the bondholder. The "zero" in "zero coupon," then, means that this kind of security does not make any interest payments, as bonds do.
How they work
Why would anyone go for that deal? Because zero coupons are issued at discounts usually far below the face value, or par, of the security. For example, if a company sells you a $1,000 bond for only $700, it’s a zero coupon bond.
As with bonds, the issuer pays the holder the par value when the instrument reaches its maturity date. So, while your zero coupon will not make regular interest payments while you hold it, it is designed to pay out much more than you paid for it when it matures. While this growing value appears to be similar to the capital appreciation of an investment in stocks, it is essentially compounding interest income, not a capital gain.