What are Zero Coupon Bonds

A zero-coupon bond is a bond which is bought at a price lower than that of its face value, with the face value repaid at the time of maturity. Or in other words zero-coupon bonds are purchased at a huge discount, known as deep discount, to the face value of the bond. Hence zero-coupon bondholders gain because of difference between what they pay for the bond and the amount they will receive at maturity. Zero coupon bonds were first introduced in 1960.

Zero coupon bonds are different from the normal bonds in the sense that normal bond pays regular interest to the bondholder and also investor has to purchase normal bond at face value unlike zero coupon bond

However zero coupons tend to fluctuate in price much more than other type of bonds. The current value of a zero coupon bond before it matures will oscillate according to fluctuations in the interest rate. The bond value is inversely related to interest rates hence, as interest rates rise, the value of the bond will fall and as interest rates fall, the value of the bond will increase

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