Zero Coupon Bonds: Meaning & Definition with Example

The bonds which do not have coupon rate are called zero coupon bonds. Sometimes company issues bonds which doesn't pay any coupon interest. This type of bonds are issued at huge discount. The investors earn from the gap between face value and the issued price.
Let's see a example, You purchased a 5-years zero coupon bond at a discount price of $500. It has a face value of $1000.

In this example there is no coupon rate so you will not receive annual coupon payment. At the end of 5th years you will receive a payment of $1000. By purchasing this bond you will make $500 ($1000 - $500)in five years.

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