Zero Coupon Bond

 zero coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. That definition assumes a positive time value of money. It does not make periodic interest payments or have so-called coupons, hence the term zero coupon bond.

A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.

A zero-coupon bond is also known as an accrual bond.

When the bond reaches maturity, its investor receives its par (or face) value.

Examples of zero-coupon bonds include US Treasury bills, US savings bonds, long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons. Zero coupon and deep discount bonds are terms that are used interchangeably.

Some zero coupon bonds are inflation indexed, and the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power, rather than a set amount of money, but most zero coupon bonds pay a set amount of money known as the face value of the bond.

Zero coupon bonds may be long or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years.

The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills. The US Treasury bill market is the most active and liquid debt market in the world.

Uses of zero coupon bond

Pension funds and insurance companies like to own long maturity zero coupon bonds because of their high duration. That means that the bonds' prices are particularly sensitive to changes in the interest rate, and so offset, or immunize, the interest rate risk of the firms' long-term liabilities.

Significance of Zero Coupon Bond

The lander has keep Zero coupon bond in the Held-to-Maturity (HMT) bucket, not requiring it to book any mark to market gains or loose from these bond because these bonds are not tradable.

The government has found an innovation way to capitalize bank, which does not affect the fiscal deficit while at the same time provide much needed equity capital to the bank.

The fund raised through of zero coupon bond can deployed to capitalize the state run bank.  

Difference between regular bond and zero coupon bond

The difference between a regular bond and a zero-coupon bond is the payment of interest, otherwise known as coupons. A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such interest payments. Instead, zero-coupon bondholders merely receive the face value of the bond when it reaches maturity. Regular bonds, which are also called coupon bonds, pay interest over the life of the bond and also repay the principal at maturity.