An investor makes money on a zero-coupon bond by being paid interest upon maturity.

Also known as a discount bond, a zero-coupon bond is a type of bond purchased for an amount lower than its face value. The full face value of the bond is repaid when the bond reaches maturity.

The party who issues the bond does not make interest payments, which is referred to as the " coupon ," but pays the full value once the maturation process is complete. Treasury bills T-bills and savings bonds are two examples of zero-coupon bonds. By contrast, investors who retain regular bonds receive semi-annual or annual interest payments, or coupon payments, and the entire principal of the investment upon the bond reaching maturity.

rehojuvuyequ.web.fc2.com | Zero Coupon Bonds

Though most zero-coupon bonds pay a set amount of money, thus having a set face value , some bonds are inflation-indexed, in which case the amount paid back to the bondholder is determined to have a specified amount of purchasing power instead of a specific dollar amount. The amount of time involved for a zero-coupon bond to reach maturity depends on whether the bond is a short-term or long-term investment.

A zero-coupon bond that is a long-term investment generally has a maturity date that starts around 10 to 15 years. Zero-coupon bonds that are considered short-term investments typically have a maturity that is no more than one year.

These short-term bonds are usually called bills. Because zero-coupon bonds return no interest payments throughout the maturation process, for example 17 years, investors in the bond do not see any profit for nearly two decades. A retired investor seeking to maintain a steady flow of income sees little use for zero-coupon bonds.

However, a family saving to buy a vacation retirement home could benefit significantly from a zero-coupon bond with a or year maturity. A zero-coupon bond may also appeal to an investor seeking to pass on wealth to his heirs.

Zero-coupon bonds issued in the United States retain an original issue discount, or OID, for tax reasons. Zero-coupon bonds often input receipt of interest payment, or phantom income, despite the fact the bonds do not pay periodic interest.

For this reason, zero-coupon bonds subjected to taxation in the U. As an alternative to this process, if a zero-coupon bond is issued by a U. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin?

This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. How does an investor make money on a zero coupon bond?

Maverick May 6, — The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest Learn how to calculate the holding period return yield for a zero-coupon bond based on a formula with a relevant example Learn about the Macaulay duration and zero-coupon bonds, the formula used for the calculation and how to calculate the Macaulay Find out more about the Macaulay duration and zero-coupon bonds and how to calculate the Macaulay duration of a zero-coupon Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate Zero-coupon bonds are bonds that do not make any interest payments which investment professionals often refer to as the "coupon" until maturity.

For investors, this means that if you make an What every investor needs to know about taxes and zero-coupon muni bonds. Instead, the investor buys the bond at a steep discount price; that is, at a price Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity. An original issue discount is the amount below par at which a bond or other debt instrument is issued.

Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk. Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need Bond investing is a stable and low-risk way to diversify a portfolio.

Find Unclaimed Money, Funds and Property | Never Claimed

However, knowing which types of bonds are right for you is not always easy. The separation of a bond's periodic interest payments from its A debt security that doesn't pay interest a coupon but is traded An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers. Get Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy.